(Hint: It’s Not Benchmarking)
In the very early stages of building a team, founders offer equity and write salary numbers on a napkin to bring new people aboard. After about the 20th or 30th hire, however, the leadership knows they need to be more thoughtful about the process. The first question they usually ask for help is where to benchmark salary data.
There are certainly great data sources out there, but before benchmarking, I encourage our entrepreneurs to think through their compensation philosophy. Once you’ve identified what kind of culture around reward, performance, and incentives you want to create, then we can find benchmark data that fits your culture.
What’s Your Compensation Philosophy?
A compensation philosophy isn’t complicated. It simply describes the guiding principles behind your company’s pay practices — and how those practices support your overall strategy. In many cases, you already have some sense of these principles; you probably just haven’t written them down. This just means documenting how you’ll make decisions about pay.
A compensation philosophy should be short, actionable, and applicable across your workforce, while at the same time being flexible enough for all the different types of talent represented. It should reflect your values as well as the companyp size, funding stage, industry sector, mission, and growth targets.
Your compensation philosophy is about more than offering competitive rewards, or meeting the basic needs to attract, retain, and motivate your employees. It reflects real choices you have to make about your workplace culture, such as:
- Talent market pricing: How much are you willing to pay for top talent? Do you want to position your company at the high, middle, or low end of the labor market? Will you negotiate salaries, or pay all employees within set salary bands (or broadbands)? Set bands may make sense for some roles, but for critical talent, you may have to pay the market-clearing price.
- Performance-based pay: Essentially, do you believe top performers should be paid more, or do you believe people doing the same job should be paid about the same? Will you reward performance through salary raises and/or short-term bonuses? How will you ensure pay equity across a diverse team?
- Rewarding innovation: If you value innovation, you have to allow for failure and incentivize risk-taking. You may have to promote people when they take on big projects, even when those projects don’t yield positive results.
- Long-term incentives: How will you use restricted stock or other equity plans to engage employees over the long-term, ensure long tenures and buy-in with the company’s culture? Startups often use equity to reward early employees who took a risk by joining an unproven company, but then award less equity as the business matures.
- Work-life balance: How much do you want an all-hands-on-deck culture vs. a culture where employees feel they can devote attention to their family and personal lives? How you allocate paid time off and measure performance will affect this.
These choices are interlocking and overlapping. They inform all the elements of a total reward package, including base pay, short-term bonuses, equity, awards and recognition, benefits, and paid time off. But the choices you make are not inherently good or bad.
Your compensation structure cannot be all things to all people. What you must have is a philosophy you can stand behind. When employees ask whythey’re paid what they’re paid, your philosophy is where you go for an answer.
As you work through these choices and formulate your compensation philosophy, there are many details to consider. For example, how often will you review it? How frequently will you benchmark your salary bands? How transparent will you be about the bands and the process in general? If an employee believes they should be paid more, will you do a salary review? And will that set a precedent that you would do a review for anyone?
Similarly, it’s important to consider how you will roll out a new compensation philosophy. Invite everyone to gather for an all-staff meeting, then allow people to sit down one-on-one with their managers to talk through the new policies and ask questions.
When people understand why their pay works the way it does, it alleviates a lot of anxiety and frustration. When you develop your compensation philosophy, you have an opportunity to build a culture of trust and transparency. You can show all your team members how you make compensation decisions, and how much thought you’ve put into one of the most sensitive aspects of their job.