How to Write a Compensation Guide for Your Startup
Every company has a compensation philosophy, even if they haven’t written it down yet.
How you pay people, what you reward, and what you don’t reward sends a powerful message about your company culture. There are no right or wrong answers to these questions, but these decisions shape your culture just as much as a cultural communication guide or core values.
We never formalized this into a document at Proletariat but we did discuss it regularly at the leadership level. I think having a streamlined document would have made it easier for us to review and revisit this topic as we grew.
In this post, I’ll break down the key areas of compensation philosophy and how each one impacts company culture.
1. Cash Compensation
This decision will impact recruiting and retention of the team directly. It is worth discussing several different topics on the leadership level because nearly everyone that joins the team will need a salary. Consider the following questions:
Should cash compensation be a major motivator for talent to join our team? Most start up companies shy away from this because every dollar spent on salary is one less dollar of runway, but every company is different, so what makes sense for your company in your market is your call.
Do we want to compete with top of market cash compensation? Is it required to secure talent in certain roles? Paying top of market for some roles and not others can be messy but is also maybe worth it to get the talent you need.
If we pay mid-market or below, how will we attract and motivate talent that is currently being paid more? Being clear about what you offer beside cash as part of a compensation plan like this is critical to attracting talent.
What if someone wants way below market salary in exchange for more equity? More on this in the equity section, but this is an example of how compensation is often quite unique to the individual and you should be prepared to find solutions.
Should we pay differently based on region (if the team is distributed)? This decision could lead to incentives for people to move to certain areas.
2. Vacation and PTO
How your company approaches time off is important because it impacts the way people work but more importantly it can often impact their family. This goes beyond saying “we have unlimited PTO” because the details here really matter. Consider the following questions:
What policy is the best for us? The amount of time you give, how it is accrued, and how it can be used are all very important.
What holidays do we provide? Choosing certain days can make things easier or harder on people with families or those of certain religions, not to mention if you have a distributed team.
How are vacations approved? How flexible do we want to be with employees? This speaks to areas like trust and communication. It is worth figuring out under what circumstances vacation would not be approved and how you manage that.
If people crunch to hit a major deadline do we reward them with comp time? Every team would love to have great work-life balance but it is good to have a plan for when you don’t. If you don’t provide comp time do you provide overtime? Or a bonus? Establishing this before you need it will make it easier to implement.
3. Titles
Titles are an interesting challenge at startups because it is often impossible to make them reflect the roles and responsibilities on a small team. However, changing titles later can be very painful as many people come to identify with their title. Consider the following questions:
Do we want titles to be seen as a reward or motivator at the company? If titles are used regularly, like saying “this needs a senior engineer on it” it will indicate to teammates that titles matter. That may be unintentional and the title may be shorthand but that is what will occur. Where and how titles are used throughout the organization will motivate the team in different ways.
Will titles reflect role, seniority, hierarchy, or anything else? There are many ways to handle titles, and how you construct them and then explain to people why they have a certain title will change how they behave.
How do we communicate titles to external partners? Titles are used as a tool to give context to people both within the organization and outside of it. Some titles are required, like many investors would feel uncomfortable if no one at the company had the title of CEO. How titles are used externally communicates more than just what the individual does on the team, so it is important to consider.
4. Bonuses
It is generally tricky to create a bonus plan because bonuses are often best used as well… bonus. However, knowing when you would want to pay a bonus and more importantly, setting clear expectations with your team, is critical. Consider the following questions:
Do we want to pay a yearly bonus? If so, how will that be structured? Choosing to do this on merit or tenure or team performance will change the behavior of the team. I generally do not like yearly bonuses because they set up complicated expectations and rarely have the intended effect.
Will we pay signing bonuses? This goes back to some of the questions about cash comp and attracting talent. How this is handled will be one of the first data points a new employee will have about the culture.
Are there any other cash bonuses or profit sharing we want to include? There are all sorts of bonuses and incentives that exist across industries. How this factors into overall compensation can be a major motivator for new talent to join or how existing team members behave.
5. Equity
One of the biggest reasons people may choose to join a startup at the early stages is to get equity. Due to the long time horizon on most vesting it is very important to not just wing it. Consider the following questions:
Who gets equity and how much do they get? If you do only one thing from this post, please have this discussion with your leadership team. Do not start giving out equity without a thoughtful plan because equity is your most valuable resource.
How often will you provide additional equity? Most equity programs vest over 4 years and are used as a strong incentive to stay at the company. It is important to figure out what to do with people who have fully vested but also how you can incentivize great performers with more equity along the way.
6. Promotions
Promotions touch every area of compensation: cash, equity, title, and more. It can be a deep rabbit hole that opens up questions about career ladders, performance management, all sorts of other critical human resource areas that are likely not a priority for an early unprofitable start up. Consider the following questions:
How does someone get promoted? The process for this could be simple or incredibly detailed, but it is worth talking about before the need arises so individuals and managers know information like who is needed to approve and documentation they need to do it.
When someone is promoted what forms of compensation do you provide? As mentioned in the equity and title sections, there are many ways to do this. Are there certain types of compensation that is required to give with a promotion (like a title change) and are there others that are never given (like equity)?
When do we do promotions? Is it tied to performance reviews? Choosing to promote on a cycle or when needed matters. If employees know they will only be promoted with a certain window it can alter behavior. It is totally fine to have plans for both regular promotions on a schedule and off-cycle promotions when the circumstances call for it.
Is there a difference between a promotion and raise? Most people expect some increase in salary every year or so to at least match the cost of living.
Final Thoughts
Creating a compensation guide can seem overwhelming and unnecessary at the early stages, and that may be true. As you face these issues, which you absolutely will, take a little extra time to discuss as a leadership team and document them so you can build a compensation guide over time. As with anything related to culture, revisit it regularly and don’t be afraid to update it, but be intentional about the decisions you are making across the team.
As with anything related to culture, how strictly to adhere to your own rules indicates how strong your culture is around these choices.