Part 2: Compensation for Startups: Designing Your Compensation Philosophy
Hi! I’m Molly. I write about what it actually takes to lead inside growing, changing companies: the frameworks that help, the honest truth about what it feels like, and the messy work of shaping a career that actually fits.
Lessons is where those ideas live — both the writing and the conversations around it. (If you want to learn more about how Lessons and the community work, you can read more here.)
This article is part of a series on compensation for startups. It covers implementing a leveling system. The four parts are:
If you are actively designing and implementing any of these systems, we also have video courses and dozens of templates available for paid subscribers.
When a startup crosses 50 employees, founders start getting more questions like “I want to know what my career path is” or “Can I have a raise?” or “Why is that person making more than me when we’re doing the same job?”
For the founder, it can be overwhelming and frustrating. Overwhelming because you realize you may not actually have an answer to those questions – your compensation probably wasn’t super thoughtfully or methodically designed, and it may have taken on a life of its own. I see that a lot in early-stage startups.
And then it's frustrating because you might not even have a real business yet. You probably barely have product/market fit. So part of you is thinking, “Why are people asking me for raises when we might not exist in two years?”
It can both feel like a distraction AND a realization that there’s an actual problem you need to fix because:
The decisions you make around compensation impact people’s lives in a very real way.
You will perpetuate systemic bias if you’re not methodical about comp design.
Comp design can make or break your financials. The two most expensive things for software startups are usually servers and people — even the smallest comp decisions are about spending lots and lots of money.
This post shares the most important decisions you need to make to design a compensation philosophy for your startup – a philosophy is made up of the foundational principles that let you implement a methodical, scalable compensation system. I will cover the implementation part in a post that is coming soon. You can decide to get methodical about compensation at any size but I’ve done it a lot at companies that just crossed 50+ employees. Generally, the earlier the better because then you have less mess to clean up.
In addition to helping you understand the philosophical decisions you need to make, I’m also going to share the way I do this when I’m either operating or consulting. A lot of the system that I’m going to share is relatively common across companies in the tech industry, and I’m a big believer that your focus as a startup should not be on innovating in the HR world unless you have a very good reason. Within this system, you can make philosophical decisions that emphasize different things – Colleen McCreary’s work on role-based pay is one example. The goal of sharing this is to help you build something that works and then go back to the essential work of building a product people want and a company that will last.
Almost all the components of this system can scale for a while. It is loosely based on what we designed at Facebook around 500 employees and that system scaled to thousands of employees.
While I believe comp design deserves attention, I also just want to say that I’ve learned over time, again and again, that compensation isn’t what makes people happy to work for your company every day. Comp is honestly more likely to make people unhappy than happy, so truly, the best you can design for is basically to have people not think about it all the time. That is what fair and systematic compensation practices do. If something feels unfair, it grates on people every day, which just shortens their lifespan at a company. And at the same time, there are diminishing returns for tinkering with compensation systems. What you really want is a system that’s fair enough and clear enough that most people just put their feelings about compensation in a drawer and only worry about it once or twice a year.
The compensation system I describe below works in tandem with a leveling system and a performance review system (coming soon in a new post). Ideally, they are implemented together, meaning you decide on levels, design your compensation system based on those levels, and then use a performance review cycle to roll it all out and update it 1-2x per year.
The core principles of design
Fundamentally, I believe compensation systems should fairly reward people for their contributions to the company. The ideal system, in my mind, removes as much potential for bias as possible, reflects the company's stage and values, and emphasizes paying more for higher performance. The compensation system that I’ve implemented dozens of times is designed based on 3 principles:
