It’s (not) all about the Benjamins — how to build a startup compensation plan
Reward and compensation is a topic which always brings up both practical and emotional challenges for company leaders and employees. This is particularly true in startups. No-one feels comfortable discussing it, everyone has their opinion, and you’re a busy founder trying to build a business.
Your Director of Design is on 60k. But you have a Senior Engineer on 90k (you wanted to hire them badly). You also have someone mentally lined up as a future VP, and they’re on 40k, but you tell yourself that’s ok, because you were so generous with equity in the early days. I mean, they don’t need to pay rent *and* eat, right?
This thought process about money is one of several common accumulations of people debt which we see in startups across the globe.
You end up with a comp plan which has become a patchwork quilt of your nightmares, built from sleepless nights, quick decisions, ego, wants, needs, and more.
It’s not that you have done a bad job in getting to this place. It’s often a natural arrival point for many founders, but one which you should not ignore.
We see this a lot, and it’s why, at The People Collective, we built a specific module to help startups avoid the pitfalls!
So what does this mean in practice?
- No clear company philosophy, so you cannot make effective decisions about hires, promotions, planning, fundraising. This is particularly true as you build your executive team, who bring their own views.
- No understanding of the market value of your team. This makes it hard to effectively benchmark any increased change of comp over time, hire accurately or forecast well.
- Differences become compounded. Those people who shout loudest get more, and they’ll keep shouting.
- Shiny new things make more. This is a consistent mistake we see, giving away titles and money betting on unknowns instead of rewarding your hard-working team.
- Extrinsic vs Intrinsic become conflated. You are unable to enunciate why someone should be working at your company, outside of pay.
- Everyone builds their own perception of what is fair and equitable in the vacuum of limited company communications.
None of these are welcome outcomes for a growing business, quickly leading to frustration, lack of engagement within teams and overspending.
Yet, this does not have to be the case. There are some simple steps any company can take to start to bring your plans back on track, and bring more clarity and consistency.
Create a Philosophy
For this, you need to get anyone involved at setting the highest company strategy involved. There will often be more junior employees who will be a part of the system of reward, but this is not for them.
You then need to ask the right questions of your leadership group in order to define a belief system which creates value for your employees, as well as clear cost controls for you. It should cover both money, equity and benefits.
Here are some (non-exhaustive) options below:
- How often do you believe is right to run pay reviews?
- Should we overpay to hire the best people?
- Should we grant everyone equity?
- Do we care about pay gaps in teams?
- Do people get refreshers?
- Can employees be given increases out of cycle?
- Has anyone used a salary banding system before? Did it work well for you?
- Should we offer bonuses, as well as pay?
- Are your teams asking for more money? Or more equity? Or both?
You need to go pretty deep on this, as well as thinking operationally in order to understand each other. You must take the time to understand ‘WHY’ everyone believes what they do. Reward is both rational and emotional. Everyone’s personal value systems will come into play.
This means, you might also need to disagree and commit.
You need to get to a point where you have a clear, consistent philosophy, to apply to new hires, promotions, and takes into account new geographies (your first US sales hire will likely break your European system).
Top tips on planning your philosophy:
- Reward your current team as much as shiny new people
- Make sure you take care of people with less of a voice
- Keep increasing early joiners pay, even if they received a high level of equity. That was them taking a risk on you.
- Payrises based on date of joining cause logjams for your finance teams
- Pensions are a useful and real benefit
- Survey your team before adding benefits, work out what THEY want on that front, in order to better use your money.
Benchmarking
Benchmarking is what many people in startups think of regarding reward planning, but it’s nowhere near the whole story. I will therefore only give it a little time here.
At the simplest level, you need to find market rates, across several geographies then compare, by, say, Junior, Mid and Senior.
For this, you can use payscale, or glassdoor, but don’t expect accuracy, or efficacy.
To be more effective, you need to understand the percentiles by level and by department in your data set. Additionally, the ratio shifts between them, to iron out patchy data.
You then need to map your team to the right levels and see what percentile you are paying them in, for your market.
There are a few providers for benchmarks, although they, of course, only provide the numbers, not the analysis, two of the best are here, with OI the one to use if you’re small:
To do the further aspects, you’ll need to ensure you have a clear levelling and progression framework in place. CharlieHR did a great job of theirs, with a little help from some friends, of course 😉.
Top tips for benchmarking:
- Option Impact is free if you upload your data
- Radford is a much more painful data upload
- Clear levels help immeasurably when benchmarking
- Be strict on bands, but not on pure numbers
- Do not expect to get huge datasets by each level
- Use common sense when applying what you find i.e. pay decreases won’t go down well
Communications
Most problems we solve for companies have a root cause in poor internal communications. This is usually due to a lack of planning, not malice. Yet how you communicate your philosophy and any pay changes will always be seen through an individual’s filter.
As a result, you need to create a clear comms plan, which should cover:
- Why you’re resetting your comp and reward plans
- What those plans are, in plain English
- How they impact the team
- When they will impact people
Most companies are reasonable at enunciating the “why”, but the devil is in the details. It’s not enough to have a quick segment of your all hands, followed by a slack message, soon lost to the ether.
Instead, we recommend using your internal wiki, like Notion.so to write up, what your plans are, how they will impact the team and when any changes will happen.
A great way to do this is to use your notes from your initial leadership meeting. Then continue to add to these in a Notion draft as you work through the process and answer all the questions.
You can use trusted members of your team to review the work and ask anything in advance. The more you can answer those questions before committing your work to the public, the better. This should form part of an FAQ section.
A big part of this work will also be the story of the whole package. Not just the compensation, but also the intrinsic benefits of working at your company, your employee value proposition.
What are your employees able to learn during their time with you? What can they expect in terms of learning, support, an inclusive environment?
The deeper you can go on this, the better for the whole company.
Top tips on communicating:
- Build a plan for both verbal and written comms
- Communicate at an all hands, take notes of questions (they can go in your FAQ)
- Build a deep Notion page explaining Why, What, How and When, with those FAQs in place
- Listen to your team, see if you can improve your plans over time
- Do a special session on equity, very few people understand it deeply so you need to use clear examples to explain it
- The word “fair” is dangerous. It’s based on perception, not objectivity, despite external data, so be cautious!
To conclude
Building a clear reward philosophy, backed up by external research and communicated well to your team is incredibly important for startups.
Entrepreneurs and People teams have enough stress to manage, without the undue emotional and practical pressures of trying to hack an outcome for every individual in their team.
Do this and you will start to be able to sleep more again. You’ll have a clear and rational plan to answer any questions which can, and will, emerge. Then you can go back to doing what you do best.
Remember:
- Reward your current team as much as shiny new people
- Make sure you take care of people with less of a voice
- Keep increasing early joiners pay, even if they received a high level of equity. That was them taking a risk on you
- Payrises based on date of joining cause log-jams for your finance teams
- Pensions are a useful and real benefit
- Survey your team before adding benefits, work out what THEY want on that front, in order to better use your money
And if you want any further help on this, check out https://www.peoplecollective.io/contact-1 and feel free to get in touch.
