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Salary benchmarking best practices for startups

, | May 31, 2022 11:47:28 AM | By

Learn a 3-step process and best practices designed for high-growth companies.

If your organization hires regularly, you probably don’t need convincing that benchmarking is a key step in your compensation strategy. But how do you know you’re doing benchmarking right?

If you’re having problems hiring and keeping top talent or if you’re blazing through runway and equity faster than you say “Great Reshuffle,” it’s worth revisiting your comp benchmarking process. You could be making at least one of the common benchmarking mistakes that can lead to costly consequences like over excessive cash burn, over-dilution, and losing top talent to competition.

Benchmarking — the process of comparing your company’s roles to similar roles at other companies within the industry and the broader marketplace — relies on verifiable data and context. You can’t get those things from free data, the advice of peers, or candidates’ salary histories.

Salary benchmarking with reliable and relevant data helps startups:

  • Increase offer acceptance by 17%
  • Reduce gender pay disparity by 75%
  • Gain 34% more funding per round

 

“We’ve had a lot of conversations about what we need to do not only to attract talent, but to retain talent,” says Rob Allen, CFO of Uqual. “Having adequate benchmarks from the marketplace is really important for us. And in this particularly competitive environment, it’s critical to making the right decisions.”

 

 

Salary benchmarking in 3 steps

So how can startups ensure that their benchmarking process balances their need to grow teams, while preserving cash and equity?

“It comes down to confidence that you’re following a logical process that’s grounded in data and that you have a compensation philosophy that can back it up,” says Leanne Langer, OpenComp’s VP of Customer Success. “From there, there's going to always be a little bit of art, but you have to be competent in your science first.”

Here’s how to lead with science during your compensation benchmarking process:

Step 1: Select a competitive data set that’s relevant to your business.

Step 2: Make sure your benchmarks compare apples to apples.

Step 3: Identify the point in the market you can securely afford.

 

 

Salary benchmarking step 1: Select a competitive data set that’s relevant to your business

 

It all starts with good data.


“It’s really important to understand what everyone else is doing and determine if your company wants to follow the pack or lead the trend,'' says Trav Walkowski, longtime Head of People. “The only way to do that is with data.”


He also notes the benefits of reliable data on diversity, equity, and inclusion.

 

“By having that objective data source, we can guarantee that comp is never going to be biased by any kind of demographic information,” Walkowski says.


Good, reliable data is:

Verifiable
Don’t know the source? Don’t trust the data. It’s imperative that you trust the expertise of the folks who are collecting and cleaning your compensation benchmarking data.

Employer-reported
This data comes with complete context and is free of errors and bias that often come with employee-reported data.

Less than 3 months old
The market is changing rapidly, and shows no sign of slowing down. Fresh data helps ensure you’re keeping pace with the market.

Relevant to industry
Different industries have different trends, data, and benchmarks. Use data exclusive to your industry or as close to it as possible.

Relevant to funding stage
Similar to industry, companies of different funding stages will have different budgets to work with, and therefore different compensation strategies.

 

 

Salary benchmarking step 2: Make sure your benchmarks compare apples to apples

 

Choosing data from companies in the same industry and funding stage helps you make an apples-to-apples comparison of your roles. A startup can’t compare itself to a public company and a Series A company can’t compare itself to a Series D.

Using data from similar companies reduces the risk that you’ll make the wrong assumptions about what’s competitive (and underpaying and overpaying for talent) —or that you’ll place employees in the wrong pay range.

Keep in mind that the responsibilities tied to a job title can vary greatly between companies. Beware: most free survey providers don’t properly cleanse their data to account for these nuances.


“Someone in my seat would naturally be attracted to something that has zero cost to it,” says CFO Allen. “But if I expect excellence from my employees, then shouldn't I also expect excellence from my vendors? Can I truthfully sit in front of somebody and transparently say, ‘This is how I got to the number that I'm putting in front of you?’”

 

 

Salary benchmarking step 3: Identify the point in the market you can securely afford

 

Once you’ve decided how you want to pay relative to the market, you need to determine whether you can actually afford it. While you might want to pay everyone in the 90th percentile, your budget might say otherwise.

Scenario modeling will help you see the potential impact of specific decisions. For example: What will it cost to pay everyone in a particular role at the 90th percentile? 60th percentile?

Allen recommends companies look 9 to 12 months ahead and consider the implications of macro headwinds, such rate increases or global conflicts, on the market and your industry.

The final touch is to create a compensation philosophy based on data, scenario modeling, and your goals. A compensation philosophy is a formal statement that explains how your company plans to pay and reward its employees.

Here’s an example: We plan to pay everyone in the 70th percentile based on San Francisco benchmarks, regardless of their location.

With this benchmarking structure in place, you have a framework that you can use to evaluate priorities.

“It gives us the opportunity to go out and say, ‘We might have to overspend on this particular role because the value it’s going to create is outsized compared to their compensation,” says Allen.

 

 

Compensation Benchmarking Best Practices

 

Here’s more detail about the benchmarking process, plus additional steps you can take to ensure that you’re making the most of your data and creating a compensation program that supports your company:

Create a healthy collaboration between finance and HR
Finance isn’t always versed in HR, and HR doesn’t always understand the financial implications of compensation. Sharing insight between these departments will help your company make holistic pay decisions.

Place employees in job levels
Jobs levels (e.g. engineer, sr. engineer, lead engineer) help you to place people in roles based on their competencies. They also show employees what they need to work on to get to the next level. For accurate job leveling, involve managers who have deep insight into a role’s required skills.

Use data to build pay ranges
Pay ranges, aka salary bands, set the boundaries for salaries for roles or groups of roles. Each level of a role will have its own pay range, with a low, mid, and high amount.

Salary ranges are based on your company’s compensation philosophy, and together, they can tell the story of how an employee can progress at your company.

This process helps take the personal out of the hiring process.

“By leading with data and a comp philosophy, you replace the personal element, so it’s about job role and job competencies, and there are no misunderstandings from a candidate about their worth,” says Langer.

Conduct regular pay audits
Conduct pay audits regularly to spot gaps and problems while you can still fix them. Don’t wait until you get complaints or lose people. And make room in your budget to make necessary adjustments.

“If you're not doing these audits to make sure you're paying fairly and consistently, you will lose people — I guarantee that,” says Walkowski. “And it will always cost more to hire a new person than to keep someone you already have. So do the hard work and get everyone on the right page so you don't lose them.”

Remember benchmarking is not a one-time process
You have to keep pace with changes in the market and your organization. While it’s easy to focus on getting to the next milestone or fund raise, proper and regular benchmarking will not only help you reach those goals, it’ll keep your company healthy for the road beyond.

 

 

Benchmarking sets the foundation for a culture of trust

 

While we’ve talked a lot about data, compensation benchmarking is about more than salaries and finances.

“It’s important to look at benchmarking beyond tactics,” says Langer. “It’s the ultimate trust-building effort with employees. They’ll know you’re applying logic to your compensation program and not simply picking numbers out of thin air.”


And while it can take some time to solidify that trust, it can only take one bad experience or incident to undermine it. That’s why it’s important to consider how all comp decisions will ultimately affect individuals, says Langer.

“I always lead with, ‘How is this going to affect the individual employee,” she says. “How is the employee base going to internalize and perceive these decisions that we’re making?’”

 

Want to dive deeper into salary benchmarking?