The most foundational way to get compensation wrong is to offer a comp package that can’t compete with the marketplace. To make sure you don’t fall into this camp, here are four strategies to keep in mind:
1. Define your UEP
Just as companies must have a USP (Unique Selling Proposition) to differentiate themselves from their competitors, employers need to have a differentiation strategy on the value they offer their employees--their UEP (Unique Employment Proposition). Very few companies can or should compete in all areas (e.g., salary, equity, benefits, perks, diversity, mission, geography, flexibility, learning culture). See the exercise below to narrow your UEP and set your compensation strategy.
2. Research market pay
Once you are clear(ish) on your UEP, you’ll want to determine what average compensation looks like for industries, company sizes, and geographies you compete with for talent.
Tools: There are robust tools for this like PayScale, free tools like Glassdoor Salary, and input from your advisors and investors. More advanced data-based tools like Radford or Advanced-HR are great and highly recommended.
Asking candidates: You can also ask candidates to share their compensation requirements for research purposes—just keep in mind that it’s illegal to ask about compensation history because it exacerbates any pre-existing inequities in their salary. It often may be helpful to have a conversation with candidates about compensation expectations early on in the process to set expectations.
Using UEP: With your UEP in mind, determine where you want your compensation to land relative to market averages.
Note: Not every company has to—or should—pay at above or equal to market ranges. By definition, about half the companies must be below the median, and especially for early-stage companies, it’s much more likely that a higher percentage of compensation will come in the form of equity than cash.
Given our increasingly virtual and distributed hiring pool, we recommend equal pay for equal work—with pay tied to roles versus locations. The only exception we believe it makes sense to consider is location-based pay bumps in hard-to-hire, expensive markets or pay bumps for roles that require in-person responsibilities. If someone moves from one of those pricier markets, we do not recommend cutting pay (since this is almost always highly demotivating), but we suggest simply freezing all pay increases until the employee reaches their new pay level.
Once you do your research, share your findings with your employees so they understand how your business makes compensation decisions.
3. Stay current with the market
You’ll want to reassess your compensation levels every one to two years or whenever you notice an increase in departures or difficulty hiring. Especially in heated job markets, benchmarks rise rapidly, almost certainly faster than is reflected in external data sets. This is another reason why it’s helpful to have your recruiting team gauge candidate expectations so that you can keep current on where the market is moving.
Remember that employees today have access to a wide array of data on what others are getting for their roles. Inside companies, it’s common for people to share what they’re making (and we believe it’s a good thing because it fosters transparency and creates positive pressure towards fairness). Plus, in a strong job market, it’s likely your best employees are getting calls from recruiters telling them exactly what they can earn at other places.
Keep in mind that:
There may be lots of historical reasons why an employee is undercompensated relative to their peers—perhaps they were a very early employee or others negotiated better when they were hired (this is a big reason why we discourage companies from negotiating offers).
Either way, employees will be increasingly resentful if they feel underpaid.
While it may seem unusual to offer an underpaid team member a significant increase, consider how much it will cost you to replace that employee. In almost all cases, it’s far less expensive to retain existing employees than hire new ones. You will likely be paying that new employee market rate at the same premium “increase” you would have given to a known quantity.
4. Expand your hiring pool
Another way to make your compensation strategy work with your hiring needs is to constantly seek ways to expand your hiring pool.
Can you hire in cities where cost of living is lower or job opportunities are more rare?
Can you reduce unnecessary barriers to entry (like years of experience or specific education requirements) and search for potential over experience?
Can you invest more in employee onboarding and training so that employees don’t have to come in fully-loaded with all the skills and knowledge you need?
Cash is often not the most important component of overall compensation, and it’s certainly not the biggest driver of retention. If you are an early-stage company, it’s very likely that you don’t have a significant amount of cash on your balance sheet. But you do probably have meaningful equity to offer, perhaps with considerable upside.
We’re big fans of using equity as a key aspect of compensation. It’s much more closely tied to retention and, more importantly, it aligns all employees around common, shared goals for company performance. Startups are often a marathon, not a sprint. You want to orient your compensation around long-term objectives and ensuring all employees have a real stake in the company’s success.
Just as businesses need to differentiate themselves from their competitors to attract and retain customers, they need to differentiate themselves from other employers to attract and retain talent.
To define your company’s Unique Employment Proposition (UEP), try this team exercise from LifeLabs Learning:
Keep in mind that non-financial benefits are becoming a more impactful way to differentiate your company. For example, strong benefits around physical, mental, and financial wellness are increasingly important and compelling.
A great company to work for often means you don’t have to pay the highest cash levels to employees to get them to join and stay!