Turning Salary Benchmarking into Compensation Strategy

Having (A) been in the compensation industry for nearly a decade, (B) run Option Impact, a pre-IPO salary survey, for 5 years, (C) worked with over 5,000 startups and 300 VCs, and now (D) helped companies streamline comp cycles, I’ve seen just about every compensation strategy, or lack thereof, under the sun.

Spoiler alert: There’s not a magic playbook that will tell you exactly what you should do when building out your compensation strategy. Your company is unique, your budget is unique, and your strategy will be unique. To get started, you’ll need to figure out how to best incentivize current and future employees, in a scalable way, with the means you have available.

At the end of the day, the best indicator of the health of your compensation strategy is your offer acceptance rate and attrition. If people feel well-compensated, it’s more likely that they’ll choose to work for and choose to stay at your company. If you’re seeing a higher rejection or resignation rate, and there aren’t other systemic issues to address at your company, then you’ll likely want to adjust your compensation positioning, budget permitting.

        Step 1: Get benchmarking data

        Step 2: Make high-level compensation strategy decisions

        Step 3: Combine the data and strategy

        Step 4: Review

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Step 1: Get benchmarking data

Benchmarking is the first place to start if you’re looking to build out ranges for your compensation strategy. Whether you’re using Comprehensive.io, guessing, asking your VCs, or using another source (Salary.com, Glassdoor, Option Impact, Radford, Pave, Croner, ERI etc.) – you need to get some sense of which data you’d like to attribute to which roles. (Psst. Comprehensive.io culls market data from active job posts and aggregates it to provide a new, dynamic dataset. It’s free – no survey input nor integration required.)

‍Common mistakes:

Companies rely too heavily on imperfect market data. The goal is to find a dataset that is directionally correct and/or fiscally attainable, then tweak it to align with the company’s available resources and roles.

Private companies shouldn’t only look at private company data - if your equity is non-existent or less than compelling in quantity or potential upside, you’re competing on cash. This means it’s a good idea to consider public company benchmarks in your quest for data.

Amount of funding varies greatly by company and round. Data is often pulled by funding round, whereas a capital raised or revenue data set will often give you a more accurate grouping of like companies.

Looking for exact data for unique roles or companies that are the exact same as yours (same funding, number of employees, etc.) can lead to smaller and therefore skewed results. Best practice is to start with a larger sample size for more accurate data.

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Step 2: Make high-level compensation strategy decisions

Consider multiple factors for your cash compensation strategy - where you’ll play in the labor market, the value of your equity, and the value of jobs at your company.

• Salaries are driven by competition in the labor market and high-demand jobs likely necessitate higher pay. When deciding which percentiles to target for your salary ranges, you’ll want to (REALISTICALLY) consider what you can afford and also the amount of competition for hiring each role. This means you might target lower percentiles for more common functions, but target higher percentiles for harder to place positions (ex. technical roles).

• Companies with an actual or perceived higher value of equity can rely less on cash ranges and recruit using their logo as a selling point. A dollar is a dollar is a dollar, but one share at one company does not equal one share at another. Companies that are earlier stage or have lower-valued equity will likely need to either sell their story (the potential upside of their equity), or increase their cash ranges to offset the lower equity value.
• Have an idea of which jobs are similar to each other at your company, then build ranges into a simplified framework. This reduces your dependency on market data, if a consistent relationship between functions and levels in data is not present. For example, although data may differ between G&A functions, you might consider paying all business roles (Finance, HR, Legal, etc.) with the same set of ranges. Then, you can ensure that the employees within these roles will be paid with the same methodology as your ranges evolve. Another example is to pay Technical Services, such as QA, at a discount to your technical ranges to ensure the correct relative value between the two functions. This framework can expand and become more complex as a company grows.

Common mistakes:

Compensation doesn’t evolve as quickly as the company. Available resources and need for simplicity or complexity can change rapidly, especially at earlier stages. Companies should revisit and reassess strategy with each compensation cycle to ensure that the strategy reflects the company’s current position.

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Step 3: Combine data and strategy

Benchmarking alone is not a strategy. You need to take a holistic look at your data and ensure it makes sense relative to a role’s level and value at a company.

• Start by grouping your roles into what you might consider a job family. Using the example before, maybe you have Finance, HR, and Legal in the same group based on relative value to your company.

• Then decide what job families you’ll use to create each range. Typically you’ll use whichever has the strongest data set (most data points), but you could also go with the highest compensation or a blend of all the roles. Perhaps you have a large-enough Engineering department to consider multiple separate job families - in this instance, you could create multiple ranges for a department.

• Use your target percentile to set your mid-range then add in a range width to calculate the high and low ends. The goal is to have overlap from the high of one level to the low of the next to allow for career progression within a level.

• Pull all levels for the entire set to see trends in the data and identify any skews. Be on the lookout for irregularities such as higher levels with lower salaries than levels below, or data compression where there’s not a consistent distance between the midpoint from one range to the midpoint of the next range. If you see inconsistencies, look towards the market data with the highest number of data points and then adjust the other levels accordingly.

Common mistakes:

Blindly treating benchmarks as ranges can lead to inconsistencies between levels and functions. Market data can be inconsistent for a number of reasons including ad hoc hiring, incorrect leveling or job family selection, and skews based on survey participants.

Don’t set it and forget it. You’ll want to revisit your ranges between every 6 and 12 months to see if there have been any changes to the market and adjust accordingly. This will ensure that you’ll be able to remain competitive.

On the flip side, don’t change your ranges too frequently to avoid following fluctuations of the market.

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Step 4: Review and refine

Refining your compensation strategy is an iterative process - it takes some finessing to develop something that’s consistent, aligns with your philosophy, and fits in the confines of your budget.

• Review your workforce with department heads in a visual framework. By looking at actual employee names and titles in peer groups, you’re able to see if there are any levels or job families that need to be adjusted.
• Then overlay current employee compensation in comparison to your ranges and adjust as needed. If all your employees are above your range, your strategy should probably reflect a higher target percentile to align with current compensation. Likewise, if your employees generally fall outside the lower end of your range, consider lowering the mid-range, especially for less competitive roles.

• Decide how to allocate increases for your employees. Range building and revisions typically precede compensation review cycles where you’ll need to weigh market adjustments, merit increases, promotion, and budgets. Salary increase amounts are formulaic in the beginning, then, managers should provide input to address how the suggested increases align with performance and impact.

Compensation review cycles are extremely manual, time-consuming, and error-prone when you’re capturing all of this information and tracking recommendations via spreadsheets. But, comp reviews don’t need to provoke a sense of dread.

Comprehensive integrates with your existing HR systems to provide a seamless experience for managers, executives, and cycle administrators alike.

Calculate increases, solicit feedback, and calibrate employees with ease and confidence. Then communicate compensation to employees with automated award letters and a total rewards dashboard.

If you’re still running your comp cycles like they did when dinosaurs roamed the earth - stop immediately and let’s chat about how to modernize your compensation management!