Here’s How You Should Compensate Your Employees

The definitive guide to crafting a standout compensation package

Andy Chan
Andy Chan
Jan 18 · 8 min read

Today’s job market is extremely competitive for a few reasons. One, there’s a wealth of information on employers out there — employees are hence getting pickier and curious about the jobs they are applying. Two, the focus on employee experience created a moat that many companies stuck in a bygone era can’t cross. Three, culture is important enough for employees to willingly sacrifice a percentage of their salary for the right one to work in.

As such, companies are frantically stepping up their hiring game over the past several years — this decade will see the same. As McKinsey called it, this war for talent is turning into an all-out battle between companies for talented candidates. That means promising great workplace cultures, employee perks, equity bonuses (if it’s a startup), and even stock options.

The list goes on, but one of the surefire ways to increase your chances of getting a talent on board is to offer a standout compensation package.

With platforms like Payscale and Glassdoor, the compensation package has never been more scrutinized than today. Employees are caring more about how much they’re earning. Wage gaps arising from gender, ethnicity, and nationality are also being torn down — for companies, they’re significantly bad press.

Essentially, your compensation package can determine whether an employee is satisfied with their jobs. Unfortunately, a tremendous number of employers are failing to satisfy their employees, according to an Indeed Survey in 2018.

Yet, you also don’t want to overreach and pay more than what you’re getting.

Rather than give base marker rate salaries and call it a day, you need to set aside time to dig deeper into data and adjust with formulas. In reality, for every position you create, you need to step into the candidates’ shoes. That way, you can ensure that what you’re creating is indeed fair and equitable.

First, salary isn’t everything in the compensation package.

Understanding the compensation package will help you realize that there is a lot of flexibility. For instance, you can adjust your base salary to offer more benefits and bonuses. Some companies focus on commissions (e.g. sales jobs) as well.

In sum, the total value of your compensation package is what drives the chances of hiring real talents. Base salary is one thing, but employees are always keen to know beyond the monetary remuneration.

Essentially, you will have to structure your compensation package depending on your role. There’s no right or wrong way: the key is to adopt a compensation philosophy that you can consistently apply, then adjusting for individual contexts.

Setting the Base Salary

Not knowing the global market rate for a job position you’re offering is a cardinal sin for any hiring manager. While it may seem unrealistic to benchmark against global rates, using market salary is the best way to ensure that what you’re paying is within competitive range — with budget, this can also increase.

Don’t Use Past Salaries as a Benchmark

The most common way for companies to determine salaries is to base it on a candidate’s current salary. For instance, a qualified candidate can be earning an annualized salary of $50K as an accountant at his previous company. An accountant in your company, however, earns $60K a year. Last year, you gave one of them a raise of $2,000 to meet the $60K ceiling.

To hire your qualified candidate, you would have to raise his salary to the current salary floor in your company: that constitutes a $10K pay raise. Hence, by asking the previous salary, you can ‘match’ it by paying substantially less, offering a range of $52K — $55K. After all, it seems ‘unfair’ to your existing accountants, who barely had a 3.5% pay increase.

Yet, that’s just lazy and unethical.

Determine future salary based on past salary does not accurately reflect the value of a candidate’s skill.

While you can still ask for the past salary, you should only use it as a data point to determine where your salary ranges stand in the market, rather than using it to decide how much to pay in the future.

Use Market Salary Rates

Data is the best way to determine salary. Using past data and then reconciling with your means, you can decide how much you can afford to offer for a candidate. If your candidate’s current salary is below your target for the job, you can ignore the prior salary and offer your target instead.

To find market salaries, you can find these following sources:

  • Data from salary aggregators (e.g. Payscale, Glassdoor)
  • Free market data from government agencies and boards (e.g. U.S. Bureau of Labor Statistics)
  • Commissioned survey data from recruiting consultancy and data firms

However, common roles often have varying job descriptions. For instance, a “marketing manager” in a social media platform can be different from one in an e-commerce company. Using job descriptions can provide a more accurate reference point for comparison.

There are also unusual roles where market data is less readily available. If you have these roles already existing in your company, you can find the median salary and start from there.

Determine Your Compensation Philosophy

What’s your formula in determining how much your base salary is? Every company does this differently but typically, companies look at offering a salary range meeting the market rate or slightly above it. Based on the job context, your base salary reflects the values and attitudes of the compensation package.

For starters, many companies use the 50th percentile of the market range as their starting point. Thereafter, adjustments are based on how equitable you want your salaries to be and the urgency of the role.

  • Brain drain adjustments. Skilled employees are people you desperately need. Typically, companies would offer 10–20% extra on top of the market rate.
  • Cost of living. Two people working in the same role may be living in different areas. The one living in an urban, city area might be suffering from a higher cost of living as compared to the one in a rural area. Adjusting for the cost of living can help the person staying in the urban area earn the same “real” income as the other. SF-based startup Buffer uses such a multiplier.
  • Experience levels. You can have people who different levels of experience working in the same role. This is where you lean into subjectivity: what experience is considered the most valuable to you and how much do you need to pay for that to be in the company?

For companies hiring remotely, adjustments are much needed. For instance, salary based on market rates in Hanoi will be substantially less than if you were to calculate based on San Fransisco market rates. Hence, companies in areas where the cost of living is low can be disadvantaged, which thus requires additional multipliers and adjustments.

Bonuses

Additional monetary incentives can be discretionary or nondiscretionary. These are always included in the employee contract. At times, they are based on milestones. Common bonuses include:

  • Profit-sharing/gain-sharing based salary per month/percentage. For instance, you might receive 2 months worth of your salary in profit-sharing bonuses, or 10% of your annual salary. Sometimes, profit-sharing can be in hard numbers (e.g. $5,000 in bonuses) based on other figures. Common in manufacturing and engineering companies
  • Sign-on bonuses for new hires
  • Retention bonuses to keep talents — WeWork’s chief legal officer had $12 million in retention bonuses. Singapore’s military also has such bonuses based on age
  • Sales commissions for employees in business development or sales roles
  • Milestone bonuses — this is usually in the form of a program. For instance, Grab private hire drivers are part of a missions scheme to earn more monetary incentives

Noncash Benefits

Employee benefits are becoming more popular, in addition to standard health insurance plans and time off, companies can go the extra mile to offer more noncash benefits.

Common Employee Benefits & Perks

  • Insurance coverage covering dental, vision, life, travel, and employee’s dependents
  • Wellness benefits such as gym memberships, exercise classes stipends, spas, and massages — typically in partnership with another company offering those kind of services
  • Types of time off also matters: besides paid sick days, vacation days, maternity, and paternity leave, employees are increasingly looking at ‘mental health days’ for their mental wellbeing
  • Pension plans vary based on the country. In the USA, there’s the 401(k). In Singapore, there’s the CPF.
  • Investment schemes like auto-investment and funds. For instance, Airbnb has an internal hedge fund

Going the Extra Mile

Nonmonetary benefits can tip the balance in your favor. This is where you can get creative with the perks:

  • Food-related benefits and other unusual perks. For instance, Revolut offers its metal card plan for free and free dinners by Deliveroo
  • Have a baby that needs to be taken care of while you’re at work? Some companies offer onsite childcare
  • Company sabbaticals
  • Company cars — Allianz reportedly offers that, according to reviews on Glassdoor
  • The future of work is in remote working and companies are increasingly offering remote working policies
  • Some companies offer flexible working hours: you come at 7 am, you can leave at 1 pm when things are done

Equity and Stock Options

Not all equity is made equal, but they can determine a person’s tenure in the company. To make it possible for employees to own stock in the organization, companies often use employee stock options or stock bonus plans. At times, senior leaders in the company often have private, Class-A shares, with more voting rights and the possibility of dividends.

These stock options often come with vesting periods to reward employees for company loyalty. The longer you stay, the more share options you will get. Sometimes, when a company doesn’t go public, employees can be hard-pressed on their decision to leave. For instance, a huge number of Airbnb employees are holding on to Airbnb stock for years, resulting in them not being to leave so as to cash them out when the company goes public.


Any company — so as long as they have money — can offer better base salaries. However, what makes or breaks a candidate’s decision is based on a holistic overview.

Such compensation packages don’t stay the same way forever. Market rates and job descriptions change frequently and thus, your compensation package needs to keep pace.

By understanding your compensation philosophy, attracting a talented candidate within your means will always be a breeze.

Like this article? We deliver even more value on Monday, Tuesday, and Friday every week on our H+B Digest.

The Human Business

We’re all about the humans in the business.

Andy Chan

Written by

Andy Chan

Founder of Human+Business & the H+B Digest | Leadership Consultant | Content Marketer & Writer | Ex-Startup Co-Founder

The Human Business

We’re all about the humans in the business. We publish authoritative articles on leadership, management and business.

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