By Julia Dow, Jun 16, 2022 7:00:00 AM
Managing your company’s largest expense—compensation—can seem daunting, especially during times of economic uncertainty. At the same time that your organization is growing and evolving, the external market is also changing.
To get employee compensation right, you need to understand the impact of several factors, including salary transparency laws, remote and hybrid work, and an increasingly dispersed workforce. Relying on experience won’t be enough to create a comp program that cuts costs and extends runway at the same time that it attracts and retains talent. You need accurate, up-to-date, and reliable data.
7 Reasons basic internet market data isn’t ideal for your startup compensation program
You probably already know that market data is critical in determining the competitiveness of employee pay, but it can’t be just any data. It must be high-quality, reliable compensation data. However, if you pull free benchmark data off the internet or from outdated salary surveys, you will end up with compensation benchmarks that are stale, inaccurate, and poorly aligned with the employee roles in your company.
In recent Gartner research, surveyed companies said they believed poor data quality was responsible for $15 million per year in business losses. Relying on poor compensation market data can also be harmful to your business. Here are seven reasons why using internet market data could hurt your company more than help it:
1. The data likely includes organizations that you don’t consider competitors.
As a startup, you may not want to compare your employee pay to large, mature organizations, regardless of if they’re in your industry. Mature organizations are not only more likely to have a different employee profile, but also a different compensation strategy. For example, mature organizations may offer equity, but it’s likely to be structured differently from the startup equity you offer. Equity is also more likely to be a larger pay component in your organization than in mature organizations with more cash at their disposal.
Instead of using market data from the internet, unvetted platforms, or legacy survey providers that includes a hodge-podge of companies in different industries and stages of growth, it would be better to obtain compensation data from a source that focuses on pre-IPO, high-growth organizations like yours. Accessing data that only includes companies you consider competitors gives you a more accurate picture of the market and can help you avoid underpaying or overpaying employees based on poor job matches.
2. The data may be submitted by employees.
Free market data from the internet may not reflect true, accurate startup compensation, particularly if it’s submitted by employees. In fact, a recent Fractl survey found that more than 10 percent of employees did not provide accurate or truthful information when leaving reviews on sites such as Glassdoor and Indeed, with salary being the number one area in which employees were dishonest.
When reporting their compensation, employees can inflate their pay or even forget to include details such as equity and non-cash perks. In other cases, they may inadvertently make a typo when reporting their compensation. With no way to verify this employee-provided comp data, it’s difficult to know if the data is accurate.
3. You can’t see the sample size.
Compensation market data on some sites only represents the individuals who chose to submit data. It may contain data from just a handful of individuals or companies, or it may be skewed toward a particular industry or geographic location. The problem is that you won’t know unless the data provider makes that information available.
If the sample size is too small, it may not be a strong indicator of actual compensation for a particular role. As a result, the available information could give you an inflated or deflated view of actual competitive pay for specific positions.
4. There isn’t enough differentiation in job titles and responsibilities.
When considering market data, you need to compare more than job titles. Even if you’re getting aggregated compensation data from a free government source such as the Bureau of Labor Statistics, looking at the market pay for “Marketing Manager” won’t account for differences between what a marketing manager does in a SaaS startup compared to a global financial services company.
Instead of comparing roles based on job title, you need data that allows you to match and compare positions according to other critical variables, including experience, skills, knowledge, and geographic location.
5. The data may be out of date.
Free internet data — including old salary surveys released online — doesn’t accurately reflect the market as it appears today. Market conditions change fast. Just consider how the job market has changed since the start of the pandemic. According to the Pew Research Center, wages increased an average of nearly five percent to more than 18 percent across many industries in 12 months between 2020 and 2021. So looking at stale comp data from even one or two years ago surely won’t give you an accurate view of current market pay.
Given the pace of change, as well as the market’s uncertainty and VC’s calls to plan for the worst, it’s a good idea to obtain market compensation data that is no more than a quarter old. That way, you will have a real-time view of startup compensation benchmarks for your company’s positions and be less likely to base current comp on yesterday’s market.
6. The data may not include all the elements of employee pay.
Obtaining market comp data that includes salary only—or base and bonus only—gives you part of the story. You may be offering employees startup equity in stock options, stock warrants, and actual grants, so you need a comp data source that provides data on a total comp basis.
If the comp data you pull from the internet only provides one or two elements of employee compensation, you miss out on comparisons that include salaries, cash bonuses, equity, perks, and other incentives.
7. The data may not be continuously updated and verified for accuracy.
Static comp data from one moment is only helpful for that moment, especially if it doesn’t receive regular refreshes. As companies adjust employee pay and make hires, their compensation profile changes. As a result, comp data from a single download off the internet doesn’t offer lasting value to your compensation program.
To stay on top of the competitive market, you need market data that provides you with a real-time picture of benchmark pay as it evolves, verified by a reliable source. Another benefit of obtaining compensation benchmarks from a reliable source is that you have more transparency in how and when the data is obtained and verified.
Get market data you can rely on
Managing a startup is full of challenges and opportunities. You have to get compensation right. After all, to meet your goals for growth, you need competitive pay that will help you attract and retain the best talent.
Where you obtain your compensation data is just as important as how you use it. When you have access to accurate startup compensation benchmarks based on your market and stage of growth and regularly updated, then you have the data you need to make well-informed compensation decisions. For more insights, read our startup compensation guide, The High-Growth Guide to Compensation Benchmarking.
Ready to get started? Sign up for free for OpenComp’s startup compensation tool today.
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.