The Art & Science of Creating Excellent Offer Letters

Compensation Planning

Compensation planning —  also known as headcount planning or internal planning —  happens before you post a job. Done right, this foundational step will empower recruiters and hiring managers to make smart, fast, and equitable decisions in later stages. 

Here are best practices for compensation planning: 

Mirror the current market

Base your compensation strategy on defined salary bands that reflect current market benchmarks to avoid underpaying or overpaying. Generally, salary bands should be updated once a year.

Do not base your strategy on:

X Guesses
X Suggestions
X The candidate’s salary history or expectations

Use good salary data

Not all salary data is created equal. For accurate benchmarks, use data that is:

✔ Fresh —  less than six months old
✔ Provided by employers, not employees
✔ Verified by a third party
✔ Relevant to your company’s size, stage, and industry
✔ Compares jobs by responsibility, not title

We can’t stress this enough: While job titles may be similar across companies, responsibilities and salaries can vary by company size and stage. That’s why it’s important to choose data from your peers. For instance, if you’re a Series B company, don’t choose data that forces you to compare yourself to Amazon or Apple. The consequences of bad data can be costly and lead to blown budgets, attrition, and internal pay inequity. 

Create a compensation philosophy

Once you’ve completed benchmarking and determined what you can afford, create a compensation philosophy, the formal statement that describes how your company pays and rewards its employees and guides all pay-related decisions.

Full compensation philosophies are often detailed and kept internally, but you can create a summary (often called a compensation philosophy statement) to share with candidates to show that pay at your organization isn’t random. Here’s an example:

“We pay all employees in the 50th percentile of the market relative to San Francisco, regardless of their location.”

Create job levels and salary bands 

Job levels and salary bands keep compensation simple, consistent, and fair. 

• Job levels define the seniority, expectations, and responsibilities for a specific role. For example: engineer, senior engineer, and lead engineer will each have their own criteria. They’ll also have their own salary band. 
• Salary bands, also known as pay ranges, set the boundaries of compensation for a particular job level. A salary band is defined by a minimum, midpoint, and a maximum salary. 

Job levels and salary bands help keep the focus on a candidate’s experience and abilities, reducing the risk of unintentional bias. They also help you explain career paths and progression to illustrate what a long-term career at your company could look like. 

Next steps

All the steps in the compensation planning stage combine to lift the mystery around compensation that often leaves candidates wondering, “Is this a company I can trust?”

Once you have your benchmarks, job levels, salary bands, and compensation philosophy, you’re ready to go to market and start the interview process.

The Interview Experience

What a candidate experiences and feels throughout the interview process does more than influence their decision to join your company. Consider the interview stage an opportunity to establish a trusting relationship with a future employee. 

Best practices for the interview process are about conversations with the candidate, as well as the internal processes that affect those conversations.

Confirm internal alignment 

Before you contact a single candidate, all stakeholders and approvers must agree on:

• The job level and salary band
• The equity component of the offer, including the type of equity and vesting schedule
• Your compensation philosophy
• The criteria and budget for exceptions

Outside of finances, the team also needs agreement on:

• The order of the interview process
• How you will assess the candidate’s skills to determine job level
• Interviewers
• Approvers
• The candidate’s main contact

Internal alignment helps hiring managers talk about comp confidently and paves the way for a smooth candidate experience. Confirming alignment will also help you spot whether the stakeholders’ expectations for compensation match the current market. If not, use your benchmarks and compensation philosophy to steer your team in the right direction.

Give hiring managers the tools they need to run fair and effective interviews

Interviewing is both an art and a science that requires practice and training to get right. 

Provide interviewers with training on:

• How to talk about compensation as it relates to your company
• Diversity and how unintentional biases can influence how they view and interact with candidates
• A preset list of consistent questions to ask all candidates 
  
  

Talk about compensation early and often

You never want to discover a mismatch of compensation expectations when you’re close to an offer. 

Even if you’ve posted a salary band with the job listing, explain the salary band and your compensation philosophy during your first conversation with a candidate. Ask if they’re comfortable with that band.

If their expectations are outside your budget, or the market, ask where they got their data. Most candidates only have access to free, employee-reported data that doesn’t account for company size and nuances that affect compensation. 

No matter the type of candidate, don’t ask about salary history. Not only is it illegal in an increasing number of states and localities, it can continue pay inequities set by previous employers.

Because a candidate’s circumstances can change during the process, check in periodically to ask how their search is going and if they’re still interested in the role and its salary band.

Don’t forget to talk about the job 

Sometimes, discussions about the role can get curtailed by a focus on compensation. 

Make room in conversations to discuss responsibilities, the metrics for success, and the team the candidate would work with. Ask the candidate if what they’ve learned matches what they’re looking for. What part of the job is most interesting to them? Is anything a surprise?

Next steps

By the end of this stage, you’ve established rapport with the candidate, assessed their skills and fit for the role, discussed compensation, and understand their expectations and goals. 

If the candidate moves on to the next stage, the offer, there should be no big surprises for either of you. 

The Offer Experience

This final stage in the hiring process can either be the cherry on top of a seamless interview process, or it can be a roadblock that leads formerly enthusiastic candidates to wonder if they should keep the job search going. 

Here are best practices to help move a candidate from offer to new hire:

Present the offer only when the candidate is ready

You might be ready for the offer, but is the candidate ready to receive it? Before delivering an offer, ask the candidate if they have any concerns. This is your chance to clarify misunderstandings or address possible objections. Don’t let lingering questions muddle their decision-making once they have the offer in hand. 

Give approvers easy access to compensation data

Without a reminder of your pay strategy, your approvers could make decisions based on bias or false assumptions.

Remember all the information you put together in the compensation planning stage – benchmarks, job levels, salary bands, and compensation philosophy? Make it easy for approvers to access this information whenever they make a decision.

Know the historical payouts

Look at aggregate data for previous offers for the role. What offers were accepted? What offers were declined and why? Did the candidate come from a much larger company and expect a higher base salary? Do previous objections apply to your current candidate?

By taking the time to review offer data, you can:

• Gauge the likelihood of acceptance 
• See where you may need to make adjustments
• Spot biases that may have influenced the offer
  
  

Have a system for fast and efficient approvals

Slow approvals can kill a candidate’s enthusiasm and lose their trust. 

Approvers must know:

• The cadence of approvals
• When an offer is ready for their approval
• The method to submit their approval or feedback
• Their deadline
• The information and context they need to make their decision

Not only does a defined approval process speed things up, you’ll reduce the risk of giving a candidate an offer before it’s approved. It happens!

A detailed offer letter

The offer letter is another opportunity to provide the candidate with clarity and transparency.
Do more than include the compensation and benefits.

Level up and remind the candidate about all the things you talked about during the interview process, especially how the offer was created and the potential value of equity.

Next steps

Hopefully, after this stage, you’re onboarding a fabulous new employee.

If not, take time to evaluate all stages of the hiring process. Where did things go wrong? Where is there room for improvement? Make adjustments as needed. 

With either outcome, add the results and relevant information to your offer database to help you the next time you hire for that role. Data is always an excellent guide.