A 4-Step Compensation Checklist for CEOs & Founders

Compensation is the cornerstone of a scalable startup. As the reward for productivity and innovation, it ensures growth by motivating employees to do amazing work. Still, it takes most companies too long to get strategic about compensation. And even when they do, many tend to communicate it poorly to candidates and team members. That’s a problem when 2 in 3 employees today are looking for new jobs because of compensation.

It doesn’t have to be that way. 

In this article, we’ll review the four essential steps, which can serve as a checklist for the CEOs and founders who want to make the best compensation decisions for their companies - from the get go.

1. Compensation Philosophy
2. External Compensation Benchmarking
3. Internal Compensation Benchmarking
4. Company Constraints

Pillar 1: Compensation Philosophy

A compensation philosophy is a universal statement that defines how a company pays its employees. It reflects an organization’s values, market positioning, finances, and goals. It also provides the foundation for a company’s pay structure and overall compensation program - the “how” and “when” rewards for performance are distributed.

When companies approach pay decisions without a compensation philosophy, they’re just guessing. And guessing leads to both overspending and underspending, risking problems ranging from blown budgets to pay gaps. 

A compensation philosophy created with competitive comp data allows your company to set budget-friendly and enticing pay, to recruit and retain top talent, and to nail pay equity. To get there, your organization needs to:

• Create clear and consistent messaging.
• Use reliable comp data.
• Reevaluate their approach often.
• Discuss their plan openly and frequently.

Pillar 2: External Compensation Benchmarking

External compensation benchmarking help your company understand how similar organizations are compensating similar roles. Using expert-vetted comp data, companies map each of their roles to a job family within the comp data. Then companies map each job to a job level. 

By combining job family with job level, companies create a unique job mapping, which provides a compensation range for each role.

Competitive compensation benchmarking allows users to cut their data, parsing it for factors like revenue, funding round, headcount, location, and industry. Each company must decide which competitive market to base its compensation ranges on. 

No matter the cut, the comp data must provide apples-to-apples comparisons. Good data will provide:

• Similar comparators: The numbers must reflect companies in your market, industry, stage, and size.
• Employer-reported data: Employees often mis-report their earnings.
• Timely figures: If the comp data isn’t provided in real-time, it should be refreshed on a quarterly basis.

Pillar 3: Internal Compensation Benchmarking

If the external compensation benchmarking examines what’s going on at other companies, internal benchmarking takes a look inside your own. Like external benchmarked comp data, internal pay stats change over time. Companies bringing on a slew of new talent may see their offers rise compared to what they offered current team members. It’s essential to know how compensation decisions shift the balance of the greater team. That happens every time you hire, promote, adjust, or let someone go.

This is where compensation tends to cause an organization’s pay equity issues. It's important to conduct regular pay audits, budget for adjustments, and track DEI progress over time, both internally at your company and in relation to peers.

Pillar 4: The Company’s Financial Position

Everyone wants to hire and retain the best talent available. That means the competition is fierce, especially with behemoths like Google and Facebook playing the game. 

When hiring, this reality provides growing companies an opportunity to highlight the differences between working for a tech giant and a growth stage startup. Yes, the FAANG companies can lure candidates with prestige and perks. But a startup provides significant opportunities for equity, professional development, creativity, exposure, and impact that giants can rarely offer.

Most companies evaluate, and perhaps increase, employee compensation once or twice each year. This cycle may be the status quo, but there’s another way. With realtime data, companies can make continuous adjustments to compensation to ensure pay is competitive and fair. 

Why is this important? Today, 65% of employees are looking for a new job, citing compensation as the #1 reason why. Rather than lose top performers due to compensation, companies can get ahead of changes to the market with more frequent pay refresh cycles. When you consider that it costs 6 to 9 months of the average employee's salary just to replace them, reassessing pay a little more often doesn’t sound half-bad.

A 4-Step Foundation

Pay decisions aren’t informed by a single data point. Each of the four pillars must be considered together, as they create the foundation for each and every compensation decision that’s made. The pillars ensure consistency and reinforce the integrity of an organization’s overarching compensation program. 

As business leaders, we know that trust is paramount. When our team members know that pay programs are grounded in reliable data and deliberate process, it’s much easier to explain our decisions and focus the rest of the conversation on “what’s next.”
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Leanne Langer is VP Customer Success & Community at OpenComp and has held roles at Rocketfuel and Khoros. She also writes about topics including compensation benchmarking and leads the High Growth Matters AMA series on startup best practices. Connect with her on LinkedIn here.