The Joys of Compensation and Leveling

In my first year or two as CEO, I made a lot of mistakes. One that caused persistent pain, and was avoidable, was how we decided on compensation and leveling (titles, responsibilities, etc).

Each hire we made in the beginning was fairly ad hoc. We didn’t have an org chart plan for the subsequent 12-18 months and rarely had job descriptions. When it was time to handle compensation, either for an initial hire or ongoing adjustments, it was a negotiation. Every. Single. Time. Yes, we asked around, but our process wasn’t systematic, consistent or transparent. 

There are a few problems with this approach. First: it is exhausting. It requires a powerful few to be involved in a decision each time. Managers can’t be empowered to lead the process because they don’t know the algorithm that is in the CEO’s head. The decision is often qualitative more than quantitative. It sucks up resources unnecessarily from the founders. Second: it is biased. Those that get paid more, studies show, are often those that negotiate more heavily. Simply put, that approach will hurt DEI initiatives at your company. Third: it isn’t fair and that will come back to bite you. You might land the person because you negotiated a lower-than-market rate. Good luck keeping them when they realize that — which they will if they are talented, because recruiters will try to poach them. Conversely, you may have landed by paying more than market. That will start a precedent at the company that is painful to unwind. Fourth: it isn’t transparent. It will lead to whispering and politics because decisions were made without frameworks or standards.

I found that building a system helped take out much of the bias and pain in setting compensation. Here is that system.

“If you don’t know where you’re going, you’ll never get there.” – Yogi Berra

Like all new projects at a company, I like starting with mission, vision and values. That leads to strategy. If any of those are not clear, press pause on everything else discussed in this post and focus on bringing clarity to those frameworks. Here is why I like those frameworks.

After there is clarity in mission, vision, values and strategy, create the org chart that you think will exist for the next 12-18 months. Extreme growth might cause that to change sooner, but don’t aim for longer than 18 months. The org chart should be consistent with the frameworks mentioned above. 

Leveling: Don’t recreate the wheel

Now that you have a sense of what the org chart will be, focus on creating levels that include not just titles (which are consistent with the comp survey you will use; mentioned below) but also an explanation of what that title is responsible for. You’re helping to define what success looks like for every role in the org. Doing this will often help you realize that your titles need some adjustment before rolling out. It will also help you during the recruiting process (level explanations should be consistent with JDs and interview process). 

That sounds intimidating, but here is the kicker: this has been done 10,000 times already. You just need to find a company with somewhat similar roles, ask to borrow theirs and make some tweaks. Bonus: if this helps you realize you shouldn’t make up new titles that don’t exist anywhere else in tech — that’s a good thing. 

Compensation: Data FTW

A few years ago at a CEO conference for one of our investors, the topic of compensation benchmarking came up. Most of the CEOs were pretty aligned with the method I’m laying out here. One spoke up and said, “I think benchmarking the comp data is worthless. Just pay your employees what they are worth”. “How do you figure that out?” I asked. “You’ll know,” was his response. Spoiler – he didn’t last in the role much longer.

Ask your investors or other founders for compensation surveys. Or reach out to one of the compensation data providers (i.e. Options Impact for younger companies, Radford for those at scale, are two options) and start a relationship. Decide on comp bands. If you try to pay 99th percentile for all employees, you’ll be in trouble quickly. Be transparent and consistent about the percentile you use. You can (and should) proactively move up your teammates as the market changes — something to evaluate using updated data sets every six months.

Note 1: These compensation benchmarks aren’t perfect. But it creates a fair starting point. If a candidate/employee is pushing for more, ask them for their data. If they are relying on a more relevant survey, consider switching. If they just have a one-off offer that is at a higher level, it may be time to part ways and wish them well. 

Note 2: The surveys are notoriously bad at ongoing equity grants. Without ongoing grants, teammates will experience the typical vesting cliff that occurs when their initial grant hits four years, meaning the value of the subsequent grant is so much lower that they often feel less incentive to stay. To counteract that, consider creating a plan which provides grants periodically. I really like Wealthfront’s equity plan detailed here.

Note 3: Tokens. Web3 companies that have tokens are a bit of a new and unique beast when it comes to compensation benchmarking. I’ve talked with several CEOs and leading investors about the topic, and none feel confident about their approach. Take some solace in that and also open with your team that you too are trying to figure it out. Try to use data to the best of your ability and avoid making one-off decisions. Be clear and consistent with your framework for allocating tokens and try to adjust as and when more benchmarks become available. 

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