Budgeting for 2022 Hires: Best Practices and FAQs for Series B Startup Salaries & More

By Julia Dow, Jan 11, 2022 5:09:00 PM

Do you have hiring plan questions? We have answers to common questions from fast-growing companies like yours.

 

Budgeting and planning for new hires in the upcoming year is rarely an easy job, especially for fast-growing companies with funding rounds to consider. When you add the shifting employment landscape of hybrid and remote work and record-breaking resignations, it can seem like an impossible task.

 

Fortunately, there are best practices that will help you create a foundation strong enough to support your organization through shifts in the market and its evolution in the coming year. 

 

Whether you’re just getting started or your hiring plan is in progress, we’ve answered some of the most frequently asked questions to guide you through the process: 

  • Why is it important to get a hiring plan right?
  • What are the steps for creating a hiring plan?
  • Is there a difference between the cost of labor and the cost of living?
  • Typically, who is involved with headcount modeling?
  • What percentage of a company’s yearly budget should be used for hiring?
  • How should a very new startup hire for its first non-founder hires compared to a later-stage company?
  • How do you handle comp bands when you’re between financing rounds?
  • How do you adjust for wide swings between existing salary bands? 
  • For companies that have remote teams across multiple countries, are there best practices specific to pay bands?
  • As companies shift to remote work arrangements, where are they anchoring compensation? 
  • During the hiring process, should a company share job levels or just titles?
  • Are there best practices for tying outcomes to raises and bonuses?
  • How can C-suite executives understand the cost benefit of paying higher wages versus the cost of hiring or retaining talent?
  • How do we budget for hiring in the new year when sales are uncertain?
  • Do you expect the compensation increases that we're seeing in today's tough labor market to continue? What’s the best way to handle them?
  • As a company raises more funding, does its compensation philosophy change?
  • As we budget and plan, should we factor in changes to compensation benchmarks during the fiscal year?
  • How should we think about the equity pool usage when we go through a fund raise in the middle of 2022?
  • Any final tips and tricks for hiring in 2022?

Prefer video? Watch our on-demand webinar on Budgeting for 2022 hires.


Why is it important to get a hiring plan right?

A stagnant organization is unlikely to meet its goals. A hiring plan will help you build a foundation for growth by marrying the company’s vision with its talent needs and budget. 

 

When you create a hiring plan, you’re forecasting your budget and timing for all of your hires for the upcoming year, so get clear on the following:

  • Who do you need in terms of talent?
  • When do you need them? 
  • How much is it going to cost?

Answering those questions requires collaboration between your human resources and talent acquisition teams, leadership, and departments across your organization. Often, one department’s strategy affects another department’s because they work so closely together. Compile the hiring needs of individual departments and consider their potential effects on the company as a whole. 


What are the steps for creating a hiring plan?

There are four steps to building a hiring plan that’s right for your company. 

 

Step 1: Set business objectives 

 

Do you know what company goals your hiring plan needs to support? Consider the following questions: 

  • What time period are you planning for? It doesn’t necessarily have to be for the entire upcoming fiscal year. You could plan for shorter or longer periods tied to business milestones.  
  • What are your organization’s goals and objectives for that time period? For example, are you leading up to the next fundraise motion? Are you launching a new product or service?
  • What are your growth metrics?  
  • In the past year, what worked well?
  • In the past year, what flopped? Are these missed opportunities metrics to tackle in the new year or are they no longer relevant to your company?

Step 2: Identify the resources you need to meet your goals


Do a skills assessment on your current workforce and ask yourself the following questions: 

  • What skills are strong in your current staffing?
  • What skills are missing? 
  • Are there teams that need restructuring in order to meet organizational goals?
  • Who will likely be promoted next year? 
  • Are there succession plans for filling gaps created when people are promoted?
  • Are there succession plans for leadership?
  • Do you have a plan for turnover? Based on your best assumptions, what roles will you need to fill?

Step 3: Conduct market analysis and benchmarking

 

Here’s where you get into the actual compensation. During this step, you’ll compare your offers and team’s pay to your peers’ and decide how you want to pay relative to the market. 

 

Start by choosing a reputable provider who will give you fresh data that’s relevant to your industry and the stage of your company. Don’t turn to the internet, colleagues, or even your own experience for this data because you’re not guaranteed accurate numbers or apples-to-apples comparisons. The same job title can mean different levels of experience and responsibilities at different companies. 

 

You want data that reflects the cost of labor (see the next question for a definition) for the talent you're hiring for and your industry.

 

Once you’ve selected your market provider, identify which segments of data you’ll use for your assessments and comparisons. Will you use geography, industry, competitors, or something else?

 

Next, align your internal data to the data from your provider.  From there, create your compensation ranges for different roles. 

 

Learn more: Watch our on-demand webinar about benchmarking for private and venture-backed companies. Or download our e-book, The High-Growth Guide to Compensation Benchmarking.

 

Step 4:  Translate all of the information you’ve gathered into a hiring plan

 

Once you have your business objectives, data, and compensation ranges, start putting together your hiring plan. Your finance team will likely have a template for you to use, but in general, include the following for each role:

  • Requisition number
  • Job title
  • Hiring location
  • Compensation budget

Your document will give you a clear picture of how many new hires you plan on bringing in, your assumptions for turnover, and how much everything will cost.

 

Use this document as a starting point for your negotiations with finance who can determine whether the plan is affordable and where you’ll need to make adjustments.


Is there a difference between the cost of labor and the cost of living?

Cost of labor and cost of living are often used interchangeably in conversations about compensation, but they aren’t synonymous. Here’s the difference:

  • Cost of living is the cost of maintaining a certain lifestyle and is based on things like rent, gas, and groceries. 
  • Cost of labor is the cost of attaining work-related skills, knowledge, and experience. The cost of labor is reflected in market data that you’ll use for compensation benchmarking.

Typically, who is involved with headcount modeling?

In an ideal situation, headcount modeling for the new year is a collaboration between human resources and compensation teams, business partners, individual departments, and finance. This group will compare goals, gaps in staffing, and budgets to create a plan that supports the organization as a whole. 

 

Business partners provide the goals, departments provide their staffing needs, HR and compensation teams provide benchmarks and compensation ranges, and finance weighs in on what’s affordable.

 

From there you can make adjustments like cutting headcount or adjusting job levels to get what you need based on your budget. 


What percentage of a company’s yearly budget should be used for hiring?

How much you spend on hiring often depends on the industry and then varies by company. But typically, you can expect to allot 18% to 52% of your operating budget for salaries or headcount. Yes, that's a really large range. That's why you need to work with your business department and finance partners to make sure that what you're asking for is really necessary and attainable.


How should a very new startup hire for its first non-founder hires compared to a later-stage company?

The compensation process is generally the same for all companies, regardless of their stage of growth. The difference between companies at different funding stages is in the variety and volume of roles that need to be filled. The hiring complexity may differ, but the foundational process is the same. 

 

Start with the market analysis and benchmarking steps we described earlier to determine how you’ll target the market. After that, you’ll use the information you've gathered and the decisions you’ve made to write your company's compensation philosophy

 

A compensation philosophy is a document that explains how your company plans to pay and reward its employees based on your company’s culture, values, and financials. A compensation philosophy is the “why” behind all pay-related decisions. It helps build trust and a healthy relationship between your company and its employees who want assurance that they’re being paid fairly. 

 
With this solid foundation in place, you can move onto your hiring plan.


Learn more: Download our e-book, Compensation Philosophy 101.


How do you handle comp bands when you’re between financing rounds?

Comp bands, also known as salary bands, are pay ranges for specific roles and levels within those roles. Comp bands are constructed from raw market data and reflect the company’s compensation philosophy. 

 

As companies move from through the stages of funding, the mix of cash and equity can shift. For instance, as your funding increases, you may begin to offer less equity.

 

Companies who don’t have to raise funds often might use internal metrics for adjustments. 


How do you adjust for wide swings between existing salary bands? 

Often, budgetary constraints mean you can’t bump up everyone to a particular salary band right away. But, ideally you’ll have everyone at the minimum range at the very least. 

 

If you need to start prioritizing spend, look at all of your high performers and critical talent and make sure that they’re either close to or above the midpoint for their range. In cases where you increase salaries by more than 20% of their base salary, consider providing increases in phases. 


For the companies that have remote teams across multiple countries, are there best practices specific to pay bands?

There are a lot of nuances at play here. Companies with international teams can map their pay ranges in different ways depending on their goals, such as by:

  • Country
  • Specific cities
  • The capital city

Pay bands may also depend on the type of talent a company is hiring for and the labor market.

 

And then there's a few different ways you think about data. Do you use local labor market data or do you use U.S. data and apply a geographic differential based on cost of labor? You might find that one is better than the other at addressing the unique differences in a specific country. For example, a country might consider marketing roles as premium roles while tech roles are not. (Hey, it could happen!) If you apply only a cost of labor differential, sometimes you lose some of that nuance.

 

Otherwise, we see a lot of clients and companies doing just fine with using U.S. data and applying a cost of labor differential to get to a competitive rate for that specific country. They’re probably mapped to data from the capital city or major metro areas instead of a country average that might be about 10% less.


As companies shift to remote work arrangements, where are they anchoring their compensation? 

Compensation for remote workers varies by company strategy, but here are some examples of what companies are doing:

 

Remote-first or 100% remote companies might hire at one universal rate in a country, which gives its employees the flexibility to live anywhere.  

 

Companies with employees in different locations might anchor to the employee’s location. 

 

Some companies may develop premium and non-premium locations based on how they plan on staffing. For example, a company with headquarters or a large office in a hub like San Francisco might set a premium tier for that city with all other cities falling in the non-premium tier. 

 

Other companies might even have four tiers with premium rates in a major city, and tiers in other locations that pay 10%, 15%, or 20% less. This flexible strategy allows you to make future adjustments like combining tiers or scaling at different locations as the cost of labor changes. 


During the hiring process, should a company share job levels or just titles?

Companies handle the sharing of job levels in different ways, but it all comes back to a company’s compensation philosophy around transparency. 

 

Companies who share job levels often have a framework that goes beyond job competencies and includes things like strategies for career development and promotions. A detailed framework allows companies to clearly explain job levels, why a candidate was placed in a certain level, and what that means long term. 

 

Companies who don’t have a detailed framework may choose to be less transparent about job levels because they’re unprepared to answer the inevitable career path questions that come with sharing that information. 

 

Keep in mind that a job title isn’t always synonymous with job level. At some companies, job titles indicate levels, such as software engineer, senior software engineer, and principal software engineer.  Other companies have a flat title structure, so that all software engineers have the same title regardless of level.  Because of these variances in job title, comparing jobs across the market is challenging. 

 

OpenComp’s preference is to share the job level along with the job title because it sets the expectations for the job you’re discussing with the candidate or current employee. This transparency also sets the stage for career development conversations and helps build trust between your company and its employees. 


Are there best practices for tying outcomes to raises and bonuses?

It’s widely accepted that performance conversations are necessary, but there’s differences in opinion about whether employees should get a performance rating. 

 

We recommend performance ratings because they’re a concise way to show employees how they’re performing against expectations and encourage the behaviors your company values. Always provide context to ratings because a performance rating on its own is meaningless to the employee. 

 

Performance ratings also give you a diversity, equity & inclusion (DE&I) opportunity. DE&I is about more than pay equity. In order to make true DE&I change, you need to evaluate all your employee programs. 

 

Consider DE&I during performance calibration (a meeting among supervisors to discuss employee performance), who you're recommending for promotions, and then of course, the compensation that's associated with those promotions. It’s a chance to dig deeper into the data and ensure that you’re being conscious about the compensation decisions that you’re making. 

 

Related: Pay Equity: The Difference Between Companies That Accelerate & Disappear


Is there a recommended framework for helping C-suite executives understand the cost benefit of paying higher wages versus the cost of hiring or retaining talent? 

Quantify as much as you can by calculating the cost of attrition, hiring, and training. In revenue-generating roles, you can even include the cost of lost quotas. What would it look like if you applied those costs to bumping up staff salaries to a competitive level to boost hiring and retention? This is easier to understand than asking “what would it look like if we raised salaries by X percent?”

 

Also take into account that compensation isn't the only thing that helps attract and retain employees. You also need a strong compensation philosophy, company culture, and total rewards package to attract and retain top talent. 


How do we budget for hiring in the new year when sales are uncertain? 

Base your budget recommendations on the best information that’s available.

 

Get clear on your organization’s strategic goals and how you need to hire to meet those goals. Then collaborate with your finance team to estimate an affordable hiring spend. 

 

You can always make adjustments as needed, including pausing or postponing hiring, readjusting headcount, or on a positive note, increasing hiring.  


Do you expect the compensation increases that we're seeing in today's tough labor market to continue? What’s the best way to handle them?

There’s no clear prediction, but based on market trends, we suspect it’s going to be a tight labor market for the next couple of years. 

 

Companies are reevaluating their compensation philosophies and thinking about how they can make their offers more attractive to candidates, whether it's doubling down on their mission, or offering more cash or more equity.

 

Usually, during exit interviews, employees cite compensation as a reason for leaving.  But often, pay is actually a secondary reason. If you dig deeper, people are looking for meaningful work, education and learning, and to make a difference at the company they work for. 

 

That’s why your company’s value proposition as an employer is really important these days and can be a valuable recruiting and retention tool. Your value proposition includes career development opportunities, company culture, and the company’s mission. 


As a company evolves and raises more funding, does its compensation philosophy change?

Yes, it’s important to evaluate and update your compensation philosophy as your company grows or experiences major changes. 

 

Many things evolve as companies raise funding, including brand recognition and the benefits they’re able to offer employees. Many companies decide they don’t need to offer as much equity or that they can be competitive with lower cash offers because of the other benefits and incentives in place. 

 

Update your compensation philosophy whenever you feel that the current version can no longer explain the “why” behind every compensation decision. 


As we’re budgeting and planning, should we factor in changes to compensation benchmarks during the fiscal year?

As data is released throughout the year, compensation benchmarks and market data will change. That’s why it’s important to have salary ranges – they aren’t swayed by the market whenever new data sets are released. Pay ranges help create stability in your compensation recommendations.

 

Once you are ready to refresh your salary ranges, use the new market data that reflects the most current labor market trends.


How should we think about the equity pool usage when we go through a fund raise in the middle of 2022? 

Developing your hiring plan based on the most recent data available will help set you up for success through any changes the coming year may bring. And your comp bands and salary ranges will give you a solid foundation to build on. 

 

As we’ve mentioned in previous answers, increases in funding often mean decreases to the equity you offer. Plan on looking at how that changes your equity targets mid-year as well as other impacts to your organization, such as pay equity.  


Any final tips and tricks for hiring in 2022?

Tip 1: Organize your data

 

In case you haven’t noticed, we’re really big fans of data at OpenComp. You can never have too much, especially when it comes to compensation and people-related things. Data reveals how your programs are doing, what’s working, and what’s not. 

 

Use the freshest, most reliable external data available. And internally, organize your data and information in a way that will help serve you in the future. For example, always include requisition numbers or unique identifiers in your hiring plan. Later, when you want to compare actual hiring to what you budgeted for, you’ll have an easy way to get an accurate view.

 

Tip 2: Tap talent acquisition for market trends


Talent acquisition is on top of everything that’s happening in the market. Keep open the line of communication between talent acquisition and other decision makers in the hire planning process. Share feedback, trends, and insights – positive and negative – to build a successful plan. 

 

Tip 3: Know you needs before hiring

 

Identify your talent and succession planning needs before you try to hire. Without a plan, you’ll likely find yourself asking for a bigger budget, or eyeing a candidate that’s beyond your reach in terms of salary and career development paths. You also risk throwing off your budget for a single candidate.  

 

Tip 4: Compensation is a team activity

 

We’ve said it before, but it’s so important we’ll end by reiterating: collaboration is essential to creating a successful hiring plan. 

 

You need individual departments to tell you their needs, business partners to weigh in on goals and priorities, human resources for input on a competitive approach, and finance to assess whether your plans are affordable.

 

Build on data and collaboration to create compensation clarity and success. 


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Julia Dow is VP Services at OpenComp and has held compensation roles at VISA and Connery Consulting. She also writes about topics including compensation philosophy and executive compensation. Connect with her on LinkedIn here.