A VC Tells All: The Relationship Between Compensation Management & Business Health

Governments, employees, and arguably our own gut instincts all tell us that paying people consistently and fairly is good for business if done in a scalable way — but is it? 

In the most recent episode of High Growth Matters, we explore the relationship between how companies pay their people and how well they grow. We are joined in this conversation by Ryan Denny, currently the head of research at Friends & Family Capital, which has invested in companies like Facebook, Gusto, and Robinhood. Before that, he led compensation at Palantir for almost a decade, and he’s served in related roles at companies like Google and Nustanix.

This blog has been adapted from that conversation and covers:

• Importance of structured compensation management
• Building a strong foundation behind compensation levels
• Pay transparency as it relates to pay equity
  
  

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Don’t miss the full episode: A VC Tells All: The Relationship Between Compensation & Business Health

Importance of structured compensation management

The idea of a structured compensation management system can seem corporate and stuffy to fiery startups that capitalize on quick changes. But in reality, having a well-structured compensation management program offers quite the opposite of suits and cubicles — it offers comfort and reliability in how people are compensated throughout their entire employment lifecycle.

“A lot of early companies assume potential recruits will be scared off by structure,” Ryan says. “But especially underrepresented people who are very keenly aware of bias, strong structure and robust ways of ensuring that fair pay is positive.”

This misconception also goes directly against many existing assumptions and systems. As a team scales, members adopt more safety protocols. They accept structure in quality assurance, security and beyond. According to Ryan, compensation structure and pay equity are no different.

“Companies need to revisit the assumption that structure equals corporate and corporate equals unattractive to potential hires,” he says. “You can do yourself a lot of favors by ensuring compensation management are in place before you think it’s necessary.”

Building a strong foundation behind compensation management structure

While establishing salary bands (aka salary ranges) and structured levels is a great start in establishing a compensation management structure, it’s also just the beginning.

Each pay level should be explicitly established and defined. 

“If you have job levels in place, each has to be paired with a clear description of what that level is,” Ryan says.

When each level or role is well-defined, each conversation around pay structure can be high fidelity. For example, suppose an employee were to approach with a question about their compensation. In that case, you can have a very clear understanding of their position and what is expected of them, then compare it to the output or performance of the employee.

A clear compensation rubric creates a foundation for employees and managers to reflect on. For example, it can provide a comparison for employees to defend themselves against unpaid expectation shifts, or it can serve as a reflection point for any potential corrective action or improvement plan.

A compensation structure is crucial, even in the early stages. But a clear, concise definition of each is just as important.

Pay transparency as it relates to pay equity

As pay transparency legislation sweeps across several states and industries, mandated or not, are embracing transparency practices, one thing is abundantly clear: pay transparency lends to pay equity.

According to Ryan, if each role has a well-defined pay structure, it should be relatively easy to compare each employee with the written description of each salary band or salary range. Then, given output, pay equity and fairness should be relatively straightforward. Salary ranges for the win!

Likewise, determining how employees are dispersed across compensation and performance should also lend insight into the equity of a payment structure, and salary bands selected.

“If all your males are higher on the performance and the females are lower, you probably have other questions to ask yourself — are you creating a conducive environment to the females adding the same value as the males?” Ryan says.

To ensure pay equity, there should be a balance of men and women on performance and compensation scales. Pay transparency has provided a tool for employees to gaze past any potential information blocks to determine whether or not equity exists, therefore providing them the opportunity to advocate for themselves and others. 

According to Ryan, the nationwide move to embrace pay transparency is a good thing that he expects to continue to grow. Within five years, he forecasts that most states, if not the whole country, will mandate salary band publication on every job listing, not unlike the compensation practices of the US military.

“There's a very clear system of ranks, and those ranks correspond to pay ranges,” Ryan says. “If it’s good enough for the military, police and our teachers, why shouldn’t it be good enough for a fast-growth tech company?”

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