Creating mature compensation review processes for scaling startups

When Ted Blosser, Founder and CEO of WorkRamp, needed to rethink his company’s compensation review processes, I naturally thought of connecting him to Jenny do Forno for advice. As Talent Director at OMERS Ventures, Jenny has counselled hundreds of startups, (including working at one) through these types of scaling challenges.

When you hire your first employees, it’s such an intimate team that many companies don’t create compensation review processes. Even those that do compensation, or more broadly performance reviews earlier in the lifecycle don’t often worry about creating processes that scale. But as your startup grows, it becomes unwieldy to manage if you don’t have some structure in place.

I realized that I didn’t just want Ted to meet Jenny. Because this is such a common experience in a startup’s growth story, I wanted to capture and share the learnings with founders everywhere. So, I sat down with Jenny to understand how she advises startups through this key transition.

Eugene: How are startups typically handling compensation reviews before you work with them?

Jenny: I see a lot of startups that have a heavy manual performance and salary review process that is tied to individual employee’s anniversary dates. It’s a program that is hard to stay on top of, leads to error, can be hard to budget for and predict, is an unnecessary drain on resources.

Eugene: Wow, those are certainly a lot of reasons not to tie compensation reviews to individual employee’s anniversary dates. What do you recommend instead?

Jenny: Specifically, when it comes to compensation reviews, I always tell my startups to move everyone to a set target that can be end of calendar year or end of fiscal year if they are different and dependent on your specific cash flow needs.

Eugene: That makes sense at the high level, but I suspect the change isn’t as easy to execute as it sounds. For example, take an employee whose anniversary date is in January. If you tell them they have to wait an extra 11 months to get their review and salary adjustment at the end of the calendar year, I don’t think they’re going to be too happy about that. How do you move everyone to the same timeline without upsetting the employees that have their cycles pushed out?

Jenny: There are a lot of options that you can explore to make the change work for your company.

• All or nothing: With this approach, you give everyone advance notice and that’s it. It is what it is. A variant of this approach is to say that we are moving you all to annual and we will give you a one-time award of $3,000 — $5,000, depending on your role, to make up for the disruption as we move cycles. Your CFO likes that the award is flat and predictable, and your employees like that the extra cash helps soften the blow a bit.
• Staggered: Similar to the all or nothing approach, you still move everyone all at once. However, with the staggered approach, you build into the process a longer evaluation period and any additional salary considerations. For example — if you have been with the company for 16 months at the date of your new annual review, you will be evaluated on the basis of that entire 16 months and any appropriate increases or promotions applied at that time and moving forward.
• Pro-ration — Like the other options, you move people all to one cycle, but you do a one-time proration of any base compensation changes to their anniversary dates. Or alternatively, you can also do a proration back to set a period (ie. 3 months).

Eugene: They all seem like they have some pros and cons. What option do you recommend?

Jenny: Pro-ration is the one I tend to recommend most — employees tend to feel more fairly treated, even if the reward is delayed. I don’t recommend the all or nothing approach. It’s very blunt, but surprisingly it is often used, I think because from a CFO’s perspective it is ‘cleanest’ as I alluded to above.

Eugene: Got it. If you need to move employees to an annual cycle, use the pro-ration approach. Let’s zoom out a bit and talk about how you know what salary adjustments to make for employees?

Jenny: First off, to do any of this effectively and impactfully, you need to make sure you have your jobs appropriately benchmarked against the market rate. You need to know that you have people in the right ballpark to begin with. To get this right you can ask investors, or there are companies like the Aon’s and Radford’s of the world that do these benchmarks. There are also free or freemium tools out there like Glassdoor or Linkedin etc. — the challenge is those typically tend to be based on self-reporting and more prone to error.

Then, I like to think about compensation with a total rewards philosophy. Salary and bonus each have a job to do in your total rewards.

• The job that your salary does is to keep you at market.
• Our preferred philosophy around the distribution of base salary increases should be 0–10%. If you meet expectations, then we keep you whole relative to inflation and that tends to historically look like 2–3%. If you exceed expectations and do a great job you are in the 4–7% range. You only get 7% or more when you are setting a new standard or had a significant impact that should be rewarded.
• The job that your bonus does is to reward your performance, more importantly doing that job exceptionally or setting some new standard.

Eugene: So, I should expect a hefty bonus this year, Jenny? :) Seriously though, are there any exceptions to your guidance?

Jenny: Absolutely, there can be exceptions based on market supply and demand. These can be temporary, or more constant in nature and typically cover a geographic area. That said, in our new remote world these exceptions can be about specific, high demand roles, like a data scientist. For example, in the battle for tech talent, high demand can artificially inflate increases. if you want to retain employees. It’s well-known that in the Bay Area, technical people in specialized roles can get higher salary increases than other regions.

Eugene: Salary adjustments look like 0–10% (or 7–15% for the lucky few) when you stay at your current level. Now, how do you adjust employees for promotions?

Jenny: When you promote people, it is not part of this “distribution”. Going back to the concept of market again, you pay for the job, not the person, so you pay them what the job is worth, which starts with a market benchmark. If that exceeds the top end of the distribution, it exceeds the top end of the distribution.

Eugene: To wrap up, can you share the best or most overlooked piece of advice that you give companies about the employee compensation review process?

Jenny: My rule is simple — no 5-point scales! Never let people hide and ride the middle. You can’t afford that at a startup. Anyone who does not meet expectations should be on an improvement plan and should not get an increase. Everyone needs to contribute.

Alright, let’s turn the tables. What’s the best piece of advice that you give companies about the employee performance review process?

Eugene: Slick move, Jenny! I’d say that even though we’ve spent most of our time talking about the compensation part of the performance review process, let’s not forget about the feedback part of the performance review process. Employees want to be recognized for their accomplishments and receive constructive feedback that can help them improve their performance. I’d remind companies that moving to an annual cycle for compensation is no excuse for skipping out on providing regular feedback and development opportunities for your team.