Part 3: Compensation for Startups: Implementing and “Defending” Your Compensation System
👋Hi! I'm Molly. This is where I share the lessons I’ve learned from building fast-moving, messy, ambitious companies. For more from me, you can also find me on the WorkLife Podcast, on LinkedIn, and in Glue Club, a community for leaders who care about building great companies.
This article is part of a series on compensation for startups. It covers implementing a leveling system. The four parts are:
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Ok, friends! We’re back with the next installment on building scalable compensation practices in a startup. This post is focused on how you implement a compensation system once you have designed your philosophy. If you haven’t already, go read the post on designing your philosophy as it’s the right place to start.
Implementing a compensation system basically has two phases: 1) initial implementation and 2) maintaining the system as you grow (or defending, depending on how you think about it). This post will mostly focus on initial implementation but I’ll also talk a bit about how to maintain and defend the system so you don’t end up with a big mess.
Before we get started, I just want to make one additional philosophical / design point (on top of the ones I made in the Philosophy post) that is critical to implementation: Simple is sustainable. Let me explain… The worst case scenario is that you do all this work – design a new compensation philosophy and make all those hard decisions, do the work to map your employees to your new system, communicate your new philosophy and system to the company, etc. – and then, because of day-to-day decisions, your new system falls apart. How does it fall apart? Through a lot of small decisions. A recruiter offers someone a title that doesn’t match the framework. A manager approves a salary that is out of band. You make a counteroffer to a valuable employee who got an offer from another company.
When you’re designing and implementing this system, you have to realize that a lot of the day-to-day will be implemented by recruiters and managers through hiring and through conversations with employees. That means that simple is your friend. As you’re designing, you want to think about the most junior recruiter on your team and ask, “With a little training, can that recruiter maintain this system?” The more complicated you make it, the more likely that the answer is no.
I’ll talk about this more at the bottom of the post, but in addition to simplicity, I would also argue that some amount of centralized control is a good thing to maintain the integrity of the system. You want someone to “own” the system as it moves from initial implementation to a living and breathing – ongoing – thing. I would have that owner put themselves in the middle of important decisions like approving exceptions, etc. If you leave the ongoing maintenance in the hands of recruiters and managers, it is very likely to end up devolving into a mess.
Ok, on to implementation!
Initial implementation of a compensation system
As I mentioned in the compensation philosophy post, the earlier you can design and implement this system in the life of your startup, the less mess you have to clean up. I usually recommend doing it around 30 or 50 employees if not before. I have done it at 200 employees… it just takes longer to implement and the chaos – people outside of bands, titles that are all over the place, etc – is more significant.
There are basically 8 steps you have to go through for the initial implementation, and I will walk through those below. If possible, I try to pair this initial implementation with a performance review cycle. I start the compensation design process about 1-3 months before the next cycle (more time if you have more employees or if you have less experience with this stuff), use the performance cycle to confirm decisions around levels and comp with managers, and then finish the performance cycle by rolling out the comp philosophy and any comp changes to all employees, along with their reviews.
Later in August, I’ll share my standard performance review process and it will explain better how this all works together. At a high level, I try to always tie performance and compensation work together. That’s because (1) I like to reduce the overall time burden on the organization (otherwise you are just constantly in some sort of review as a manager) and (2) I design my compensation systems to tie performance and compensation together. (I talked about this in the philosophy post and will talk about it more in the performance post as well.)
Ok, so here are the 8 steps you need to take to implement a compensation system for the first time:
Create or update your leveling and titling system.
Design your compensation philosophy.
Get market salary and equity data from vendors.
Decide how many “functional groupings” you are going to have.
Design compensation bands.
Map current employees to your new levels and comp bands.
Add in geographic multipliers.
Start making new candidate offers using the new bands.
Let’s go through them in detail…
(1) Create or update your leveling and titling system
There is lots more detail on how to set up levels in the leveling article. Make sure you have the number of levels that works for you, and if you’re using the framework template in that article, customize the language to match how you talk about things like scope/impact at your company. Next, agree on which titles go with which levels, and how to name ICs versus managers.
