The State of Compensation in Q4 2022

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Don’t miss the full episode: The State of Compensation in Q4 2022

Trend 1: Pay transparency is driving pay band use

2022 comp data revealed that 70% of organizations now have formal pay bands — a figure that’s steadily been on the rise for the past few years and has accelerated over the past few quarters. 

One major reason for this increased urgency for pay band adoption is the push for pay transparency, arguably rooted in the new legislation recently implemented in New York City, Washington, California and others. As some companies awaited policy implementation, they invested in developing solid philosophies as a foundation for pay bands.

“The companies that have really been at the forefront have spent the time to develop compensation philosophies and salary bands,” Jason says. “As we move forward, we'll see this number increase.”

According to Ashley, the 30% that still don’t have salary bands established may be in trouble. Even if a company isn’t hiring, they must still be prepared to inform and respond to current employees’ questions.

“Even if you aren’t obligated to report, you’re not off the hook,” Ashley says. “If you’re not having these conversations in hiring or educating your team on pay bands, you’re taking a very dangerous risk.”

In our conversation, Ashley and Jason dive into the most common mistakes companies make when developing and rolling out pay bands. Are you making any? Tune into the full episode of High Growth Matters to find out.

Trend 2: Leaders get the most biggest equity 

Regardless of the size or stage of a company, the comp data reveals that leaders within organizations are receiving the greatest shares of equity. In fact, 75% of equity is reserved for executives, management and top performers.

While equity share has long trended towards leaders, the past few years have seen several shifts regarding the mindset surrounding equity.

“The notion of equity as an exhaustible resource has increased,” Jason says. “It’s being funneled more thoughtfully.”

Rather than being used as hiring incentives, equity is being rewarded to those with the most tremendous impact on the company.

“Our success is dependent on managers’ abilities to engage and motivate their teams. Rewarding their hard work is a perfect reflection,” Ashley says.

Trend 3: Total payroll grows with companies

As companies grow, their payroll rises. And while this may seem rather intuitive, the comp data revealed some interesting trends.

In the earlier stages, many companies experience gradual growth with steadily increasing payroll. But once a company reaches $50 to $75 million, its payroll increases significantly — almost tripling. 

“It’s really an inflection point,” Jason says. “They’ve truly found product market fit and are well on their way to scaling — that catches the interest of larger investors.”

With increased investment comes an extra push to scale. And the biggest investment required to scale is people. 

Trend 4: Non-tech employees outnumber tech employees

In most organizations, non-tech employees outnumber tech employees by an average mix of 60 to 40. According to Ashley, this ratio is well-balanced and necessary for success.

“You still have to have operations, sales and marketing teams,” she says. “While tech roles help you build the product, you can’t be successful without support functions.” 

Trend 5: Engineers make up the largest percentage of payroll

Despite being outnumbered, engineers make up the largest percentage of payroll, accounting for between one-fourth and one-third of total payroll, regardless of total funds raised. 

“Software engineers are high-income earners because their skill set is severely lacking,” says Ashley. “With such high demand, it’s no surprise that they make up a large portion of payroll.”

Comp data also revealed that once an organization reaches the $50 to $75 million mark, engineering’s payroll share starts to decrease.

“Once a company is hitting that mark, they’re usually adding more non-engineer positions,” Jason says. “The product is usually developed and working at scale.”

Once product-market fit has been established and companies begin to turn a profit, they usually begin to slow down on hiring engineers. Instead, the focus turns to maintaining the product with select, skilled workers and building business and people infrastructure. 

Trend 6: The number of engineers doubles with each round of funding

With each round of funding, the number of engineers at a company tends to double. Unlike software, human capital is not scalable. When a company demands more development, it must invest in more talent.

While the percentage of payroll share decreases over time, companies still need to increase engineer headcount as they scale. Though, these technical positions can satisfy different roles depending on their series of funding.

In the first few funding series, you may not have the capital to invest in technical support, system bugs and inefficiencies. So around Series C, it’s common to accumulate tech debt. 

“When you start to get into Series C and D, you have to reinvest in engineering to make your solution complete, whole, holistic,” Ashley says.

Trend 7: Most companies have a geographic pay strategy

Over the past several years, there has been a major shift from companies having four to five geographic tiers to two. Now, most companies have a geographic pay strategy at 57%.

“When you look at the cost of living across the US, it’s become flatter,” Jason says. “Because you don’t have a huge differential, you no longer need as many pay tiers as used to be common.”

Driven by the pandemic, the US is beginning to experience a shift similar to those across other countries — the cost of living is becoming more relative. As remote and flexible work options continue, these differentials will likely decrease even further.

But increased competition also plays a significant role in reduced geo tiers. As workers leave higher-cost areas to work similar positions, they expect the same pay for similar work. And in light of the Great Resignation, Ashley urges employers to rethink their pay competency. 

“How are you going to stand out from your competition? What levers can you pull and what affordability does your company have when you're functioning globally?” she says.

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