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

ON THIS EPISODE OF HIGH GROWTH MATTERS

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CAITLIN ALLEN: So state and federal governments, employees, and arguably our own gut instincts all tell us that paying people consistently and fairly, is good for business if we do it in a scalable way, but is it? In this episode we explore the relationship between how companies pay their people and how well they grow with Ryan Denny, who is currently the head of Research at friends and family capital. And Friends and Family Capital has invested in companies like Facebook and Gusto and Robinhood, among others. Before that, Ryan led compensation at Palantir for almost a decade. And he served in related roles at companies like Google and Nutanix. Ryan, thank you so much for being here. It's a pleasure.

RYAN DENNY: Thanks for having me.

NANCY CONNERY: Ryan, yes. Thank you for joining us today. We are looking forward to a conversation with with a true expert here. Yeah. And can you tell us a little more about your background? Caitlin, you did a great job there. But you know, Ryan, fill us in on a little bit more of the details?

RYAN DENNY: Absolutely. I'm sure you probably hear this a lot from people you speak to that I fell into compensation completely by accident. It's not something I studied in school wasn't my first job out of college. Coming into Palantir, I was actually hired into head there FP and a function. So one of their first finance team hires did that for a little bit. And then the CEO approached my boss's CFO saying, hey, we need somebody you can trust to handle really sensitive information around salary, bonuses, equity, this is not information we can have floating around in the open who can you trust to run analytics and, and really set up our compensation structure. So I was volunteered for the job. And I figured it was an interesting project to get into. And lo and behold, several years later, I was still happily doing it. So I've sort of found a passion for compensation, I find that something that's really, really important to people really gets into their bones, and in many ways, defines how they feel that their company and their peers value them. So I've just really enjoyed all the years of learning about how people view compensation, all the different structures you can set up. And I'm enjoying helping advise other of our portfolio companies on setting out on their journey to grow into established companies.

CAITLIN ALLEN: I love the phrase of competition gets in people's bones. It's a good it's a good visual and very accurate. Maybe maybe taking a step back from your very impressive career for one quick second. Ryan, we love to ask the question at the beginning of the episode to get to know you a little bit personally, what's something that most of your co workers don't know about you?

RYAN DENNY: I'm a bit of a movie buff and have been since college. A fun fact about me is there's this ranking on imdb.com called the top 250 films by user rankings. And there was a point in time where I'd seen every one of the 250 I think I tried to keep it up to date and run searches for ones that I haven't seen before. So I think I'm maybe only behind by one or two right now. But that's my little fun fact is that over quite a number of years, I managed to rack up all 250 films.

NANCY CONNERY: Do you watch the whole film even if you don't like the film?

RYAN DENNY: Oh, absolutely. Yeah, no, that's part of the ordeal. As you know, I'm trying to sample all different languages and cultures, because it's not just us based. It's not English based. I think you learn a lot more about the industry and about what good storytelling is. So I just trust the user votes to tell me what high quality is. That's not the only movies I watch. I watch a lot of kids movies. Now I have a four and a seven year old. So I'm well versed in, you know, Toy Story and frozen and all that as well. But yeah, a little bit of both

NANCY CONNERY: multifaceted on the movie front as well as compensation. So you first learned about, you know, the relationship, you know, between how a company pays and how fast it grows, when you were at Palantir with some, you know, amazing, groundbreaking growth, you know, how to companies tend to make this relationship more difficult for themselves. And it has to be kind of, you know, balancing the two aspects.

RYAN DENNY: You know, I think a lot of early companies and their growth, have this sense that by inserting structure into their compensation programs, that they're going to give potential recruits that are builders that are looking to create something, a sense that they're overly corporate, and so they'll avoid putting structure in place things like job levels and salary bands and performance reviews and rubrics. I think they create the unforced error of assuming that a potential engineer hire would stick up their nose at something like that and prefer to work somewhere with less structure. And the reason I say unforced error is that if you Think about as a company grows, and you say you hire a larger engineering team, they're implicitly going to be accepting more structure in other areas like requiring you to check in your code and have someone review it and to avoid introducing bugs into your software and looking bad for your customers. So if they're willing to accept more structure in that regard, why would they not accept it, in compensation ensure that they're paid fairly and commensurate with what they're doing in their role? So I think a lot of companies need to revisit the assumption that structure equals corporate and the corporate equals on attractive to potential hires, I think especially underrepresented minorities and females that are very keenly aware that there's bias in the system. Actually, we view it as a positive that you have a strong structure in place and robust ways of ensuring that you're paid fairly for what you're doing and have a clear track to how to get to the next level. So I actually think that you can do a lot of favors for yourself in diverse recruiting, by putting stuff in place before you think it's necessary.

CAITLIN ALLEN: I love kind of debunking the commonly held myth there that you just did. So thank you for that. When you say that companies need to put structure or the pay structure in place around before often they think they need to and then you just talked about some of the benefits. What does that structure look like? For those of our listeners who might not know what that means? What is it?

RYAN DENNY: In my eyes, it's not as simple as just saying, Okay, we're going to have different job levels and hire people in those levels and make sure everybody on the team has a level. If you have job levels in place, each of those has to be paired with a clear description of what that level is, I like to think of it in terms of maybe a simple rubric where, you know, if somebody comes to you saying that they don't think they're paid fairly for their role, you can pop out the rubric for their role and have a very high fidelity discussion around. What is it that you perceive your report to be doing day to day in a job? And how does that compare with the rubric? And what do you think they need to be doing to advance to that next level, or maybe even get to a higher part of the range of that current level? The conversation should always be around? What are you doing? And how does that compare with expectations, so that you can have the discussion centered around where the person needs to improve. And if there is a disagreement, you can discuss about that. And furthermore, if you have that type of structure in place, it's possible for a manager to be have an eye opening experience where they go, Oh, I didn't realize you were doing all these things. You know, maybe after hours or doing special projects that I wasn't aware of, I've now sort of had to rethink my positioning on your value out of the company. And now I think I want to advocate for you to be promoted. So it allows people to come in with an open mind and actually rethink the value out of a person at the company and how they compare to their role, that maybe they weren't quite on top of the person's day to day work as they thought they were. But it can always have a clear rubric to center that discussion against

NANCY CONNERY: some great advice. You know, and additionally, you know, in your experience, you know, what a high fidelity compensation conversations look like? And, you know, can you kind of elaborate on that term as well, for some of our listeners?

RYAN DENNY: Yeah, I mean, I feel like you, if you're a manager, having a conversation with an employee who's maybe doesn't feel like they're quite being paid fairly, either relative to others on the team, or within the range that they know that the role pays, or even thinking, you know, I'm a level two, and I think I should be level three, if you don't have a clear explanation of what you think they're doing, and how that compares to a rubric, then you're already on your back foot. If you're having really qualitative discussions, or, you know, based on assumptions around what you think maybe the role should be, but there's nothing in writing. And so it was never clear to the employee in the first place, you've kind of lost and honestly, you probably opened yourself up to, if the person wanted to litigate, you don't really have a lot of defense to explain why you thought they weren't paid fairly, to take it to a logical extreme. So the more that you have in writing in place of this is what we deem a level to to be, here's the range of what we pay, and you're paid, and then say 60th percentile at range. And over the next six months, I think that if you do X, Y, Z, you will have proven that you're ready to move up to level three. That's a great place for a conversation to be where it's clear to the employee, what they need to be doing in the next several months to show that they deserve to move up to that next level. I don't think that means that you have to have levels and rubrics for every last position at your company. If you have unique snowflake roles, they're special project based and there's only ever going to be one or two of them at the company. You don't necessarily have to go overboard spending all this time mapping all that out, as long as it's clear at the outset that this person's role is sort of falls outside of our structure and we'll have our own special way that you advance. But for your roles where you're gonna have 1012 people in a position where you're hiring several people a year into it If you get to the point where you have 50 100 people in one type of function, and you don't have any levels, imagine the pain of now trying to rip the band aid off, and put that into place and have to tell somebody who's been at your company for 567 years, hey, I think you're a level three, and that person down the hall is a four. And you probably have pretty serious sense of where you think everybody falls. And now you have this huge disagreement and a lot of politics. If you hire 80 90% of that 50 person team in and levels are all they'd known, then they have no bone to pick because they that's all they knew coming into your company. Absolutely.

NANCY CONNERY: Setting the foundation early.

CAITLIN ALLEN: Very much so. In the clarity of communication, there is high fidelity to use the phrase from earlier as was really on point. The other thing too, Ryan, that, I believe, is a very powerful, important message of what you're seeing in today's market. And in particular, especially in a remote or a hybrid environment, the way that employees experience, the company culture, the company values, really a lot is based in their interactions with their manager. And due to the point of this last question. Most of the time, when they have questions about pay, they're going to go to their manager. And it's not, it's not always an area of specialty for many people managers to talk about whether it's leveling or whether it's pay bands, things along those lines. And so equipping our managers today, I think, is at an all time high, given the importance of pay in today's marketplace, whether it's government's investors, media, employees, whatever. And then you add on top of that, just the additional kind of the newness of how we're all interacting in a remote environment. I think it complicates that.

RYAN DENNY: Absolutely. I also think that, you know, if you're somebody who's charged with making decisions about compensation for a given person at the company, given the fact that you need to know how their work compares to what you expect for that role, that means you implicitly either have to know or be maybe one degree of separation away from knowing what that person is doing. And try to avoid as many of those aha moments of I didn't realize you were doing all that I'm sorry, I been out of touch, and I need to advocate for you. In many cases, maybe you'll find that you, as a manager have too many direct reports, if you have 15 to 20 people reporting directly into you, it's actually pretty difficult to have a really good sense of what every last person is doing and how they stack up against their promotion track or where they should be paid within their band. It may cause some soul searching and saying do I need to maybe split this team and a half and then find a delegate in my team that's going to take maybe the lesser half of experienced people, and I'll take the more experienced people just so each have seven to 10 reports that we can keep a closer eye on. People need to be wary of not trying to amass too many direct reports and then not having any idea what they're doing, you're just setting yourself up for disappointment down the road.

CAITLIN ALLEN: It's almost as if the pay structure facilitates data driven decisions in that that that setting or situation that you just described. Absolutely, yes. So you recently transitioned into the VC world, and you're serving late stage and public organizations, Ryan, for those in the audience that maybe don't know the inner workings of venture capital, what it means to be to be an employee at one of those firms. Would you mind telling us just a little bit of what your day to day looks like in terms of how you work with friends and family capitals, portfolio companies to think about things like their compensation strategies and improving their pay policies?

RYAN DENNY: Absolutely, yes. So from the context of working with our companies, I think just at the outset, I'll point out that we're a smaller firm at the moment, which doesn't have enough assets under management to be leading rounds, right, we're not setting a price, we're going to be following somebody else into around. And so in order to get companies interested in taking our money, because the dollar is $1, we'd like to show that we can actually add some value as that company grows and help them think about the best way to scale their finance function, their HR function, or their compensation structure. So we sort of drawn on the diverse backgrounds of the five people at our company, to be able to help companies that are growing from maybe Series C or D into a public company to what missteps should we avoid and how should we think about setting things up? So me personally, I do draw on some of my experience in compensation and finance to try to advise our portfolio companies and point that ship in the right direction early so that you don't have a lot of pain trying to fix problems that arise maybe a year or three down the road.

NANCY CONNERY: And what are some of the most common questions that you do get from the Fortwo companies that they that you work so closely with?

RYAN DENNY: Yeah, a couple of big ones. One that's pretty common is just hey, you know, we're serious beasts. Your ECE company, and we're starting to hire a few more engineers, maybe in different countries or different levels of experience. We don't really have any good idea of what to pay them, how much should we give them in terms of our equity grant, and what's a fair salary to give them, given our limited ability to pay cash right now. And, you know, leveraging a resource like Radford is great if you're an established company with well built out, you know, hundreds of employees. If you're an earlier stage company, that's not really Radford's focus. And for a long time, there's been quantum kind of a dearth of data around there to help companies believe that they're making data driven decisions on their first several hires in a given function, which is a great thing that I've seen open comp start to do is really start to gather data on earlier stage companies and slice by things like dollars of funding raised or what round you're on. And then you can actually have an apples to apples comparison on a cohort that's really been underserved by the data marketplace and compensation. So yeah, recently, we've had a number of different people have random inquiries about this. And I've been able to leverage open comp to help them make good decisions. Another question that's popped up, completely different is, hey, you know, we're a cash strapped startup, obviously, equity as a large part of our offering. But we have some members of our sales team that for whatever reason, maybe just the stage of life that they're in, they just have high enough cash needs that you know, illiquid stock options just aren't going to pay the bills. How do we retain these people. And it's true, like a lot of earlier stage companies are they only have a certain number of months of cash on the bank account before they have to go fundraise again. And they'd ideally not like to expedite that by having to pay a whole bunch of cash today to their employees that need it. So I've started trying to help companies think of creative ways to figure that out so that they're experienced and really valued. account executives don't start departing for more mature companies with higher cash salaries. For the heartbreaking reason that even though they love the mission, they have bills to pay. So that's been a challenging one. I don't have any magic silver bullet, I wish I did, share. But that's always a fun one to work through with individual companies.

NANCY CONNERY: If you figure out that that solar event, well, it's no.

RYAN DENNY: I do think there are sometimes situations in which there's things that are disproportionately valued by the employee, and less so are less expensive to provide for the company. And it's always different for any given situation. But I do think there need to be conversations had with employees that they try to explore the different areas in which maybe you can take some cashflow burden off of the employee, while it's not dollar for dollar costing the same amount for the company. But I will point out that this needs to be done in a pretty transparent manner. We don't want these to be closed door wink and nod agreements, where now there's all these rumors floating around that, hey, so and so is able to get a big, sweet setup by saying that they have, you know, three kids in a mortgage to pay. And all the poor 20 something year old singles are left holding the bag because they don't have and they may be adding more value. So if you're going to set up any sort of agreement with a person who's saying they have high cash needs, it needs to be tit for tat and very clearly defensible to the rest of your organization that, you know, we agreed that they would turn in some of their stock options. And they won't see as big of a benefit if we blow up because they needed some more cash today, but we thought that was a fair trade. You know, it needs to be something that if it shows up on a blog post the next day that it's not going to sink company morale. So be very careful around if you're doing trying to treat those situations and retain people with cash needs, that it doesn't come across this treating a squeaky wheel to the detriment of other hardworking employees that just don't have that same cash needs today.

CAITLIN ALLEN: Yep, one of the nuances there. And it's actually a very, a great segue into my next question, Ryan, which is what do pay equity and pay transparency mean to you personally, given your deep experience in this area?

RYAN DENNY: Yeah, I mean, I think if you think about that rubric situation where any given role and level combination has a very specific description of, you know, amount of responsibility or taking on amount of supervision you require. Sometimes it's even more metric driven. You should be able to look at any given individual and score them against that rubric, and feel pretty good about the output you're seeing as far as their compensation. There's many different ways you can visualize where maybe you boil it down in...greetings you can come up with to say okay, for all the people that are say, engineering level three And there's 20 of them at our company. And our to rank them in terms of whatever performance rating we gave them in their most recent review, you better hope that that pretty closely correlates to the rankings in terms of compensation. And if you do have any big outliers, you have very clear explanations of why. Hopefully, what you don't see is it's just a random smattering of what compensation comes out, when you've ordered them in terms of what you truly believe their value is within that role. And that's where you can hopefully, avoid seeing bias coming into the system where like, all your females are below the median, your males are above, even though if you rank them by performance rating, it's nothing of the sort. And if it is, all your males are higher on the performance and the females are lower, you probably have other questions to ask yourself, have you are you creating a conducive environment to the females adding same value as the males? Because just because you have ratings, aligning well, with cash compensation doesn't necessarily mean that you're doing everything. So you probably want to make sure there's equal representation in both performance and in compensation, from top to bottom.

NANCY CONNERY: Great advice there, you know, and, you know, as it relates to pay transparency, which is, you know, all over compensation these days, and, you know, obviously, consistent with your advice, you know, you know, it's no secret that we're in very interesting times in terms of, you know, our industry, and compensation and how it all ties together and spend and, you know, I could go on and on and on. And, you know, What trends are you seeing right now, during these interesting times, and from that, you know, what predictions Do you have, specifically around the future and evolution of of paying compensation?

RYAN DENNY: You know, I'm starting to see a lot more activity at the state legislative level, as far as mandating certain things. I think that's going to continue, I think it's pretty hard for the federal government right now to come in and just blanket say, Here's how the whole country needs to behave from a level of pay transparency, or requiring offerings of 401k plans or whatever it might be. But you are seeing the dominoes start to fall, as far as you'll see one or two or three states be early adopters at something. And then the next year, several other states start to follow suit. And then it almost seems like there starts to be this escape velocity, where at a certain point, state legislators look like they're not serving their constituents very well, if they're continuing to hold out when 3035. Now 40 states have gotten onto the bandwagon for something like pay band requirements. My forecast is that maybe in five years from now, the majority of US states, if not the country, as a whole has mandated job postings must have a fairly tight salary range posted along with it could be wrong. But we've already seen quite a number of states adopted this. And I'm personally a fan of that. I mean, if you think about our country's military, you know, the people charged with keeping us safe. It there's a very clear system of ranks, and those ranks correspond to pay ranges. So if you're in the military, and you can look at somebody's stripes and know exactly what rank they are even civilian like myself could do so you can, in the back of your head, have a rough idea of what they're getting paid. And I'd like to believe that doesn't put our country in any sort of risk of having a poor serving military just because they're all bickering about who's getting paid what I think that's an military's an excellent organization doing a good job. And yet they have complete pay transparency. So if it's good enough for the military, for the police, for our teachers, why should it be not good enough for a fast growth tech company?

CAITLIN ALLEN: One of the things that you said there that I think is a very important point to put a fine point on is the concept of fairly tight pay bands. I won't mention the company, but I saw several job postings the other day that had a range from 90 to 9900. Let me redo that from 90 to 900,000. For one job. A good point.

RYAN DENNY: Yeah, no, exactly. I mean, if you're, if you're looking at a job and wanting to make sure that when you get your offer that that's you're being paid fairly, yeah, a 90 to 900. I think it's the letter of the law. Maybe they were just thumbing their nose at the law and saying, Okay, we have a salary band. So maybe it's going to become incumbent upon legislators to see the trends and then have to rewrite that legislation to get a little more specific. Yeah, I don't think you're doing anybody any favors by setting a 10x wide salary range,

CAITLIN ALLEN: I tend to agree. Rounding us out, Ryan. What's a commonly held belief to be at an HR compensation that you strongly disagree with.

RYAN DENNY: I think it's when you look at a lot of different HR people, organizations, I think there's a lot of folks who think that it's unimportant to have any sort of analytical or technical skill set. And I think that's a shame. I think that if people devote some resources and time to learning a little bit of data analytic skills, whether it be just simply an Excel or learning something like Python, or SQL, there's a wealth of data at most HR professionals fingertips, whether it be performance rating, data, compensation data, really all sorts of things that any individual whether it's an HR business partner or recruiter that wants to roll up their sleeves, and start crunching some numbers and identify interesting trends. There's so many interesting decisions you can make, and maybe concerns you can identify if you know how to slice data and what to look for. I think that there's it's not actually as scary as a lot of people think, to learn how to analyze data, there's so many different courses online, like on Udemy, and Udacity. And LinkedIn learning that for not very much money, and oftentimes your company will cover it, you devote maybe a couple hours a week, and over the course of six months, you actually can gain quite a bit of skills. And then really start adding some serious value to your team as you start finding interesting patterns in data that had previously been overlooked.

NANCY CONNERY: Quite a bit of data, front and center. You You have given so much good advice today. Our listeners are very lucky. And we are very lucky as well to be the beneficiaries of your great advice. You know, what's one thing that you want us all really to take away from this conversation?

RYAN DENNY: You know, when you think about compensation, as a general matter, I think it's so easy to get bogged down in numbers and percentiles and rankings. At the end of the day, try to remember to take a step back. And remember, you're paying human beings. And it's important to be gracious and grateful and kind to people. And when you're having conversations about where somebody's being paid, or where you have them in their pay range or when they're going to be promoted. This is very important information to them. And it's going to determine how they're able to provide for their families, how they view themselves as their status relative to others in the organization. So you really want to be delivering this information and it is kind and warm and manner as possible, and really deliver it to them in the way that you would want it delivered to you. I think a lot of people can just get really caught up in the numbers in the rubric and forget your fellow human beings sitting in front of you. So be nice.

CAITLIN ALLEN: I feel like we've come full circle in some ways. Explain why people feel compensation in their bones really effectively. So thank you for ending us where we where we started in a good way to our audience, don't forget to give us a five star rating and you can email me at podcast@opencomp.com If you have ideas for topics or guests. Thank you for tuning in for this amazing conversation. And Ryan, thank you for making it an amazing conversation.

RYAN DENNY: My pleasure. Thanks again for having me.

NANCY CONNERY: Thank you, Ryan.