In the beginning stages of hiring key talent for an early stage company, an engaged founder may spend anywhere from 40-50% of his or her time recruiting key hires. Having a clear philosophy around compensation and rewards is essential to do this effectively. Additionally, you can benefit from access to up-to-date compensation tools and resources to help hire and retain the best talent.
Why is it so important to have a philosophy around compensation early on? As a company is growing and establishing its culture and values, it needs to make sure that its compensation philosophy is aligned with the company’s overall mission and values. For example, a company that identifies with “transparency” as a value, needs to make sure that its compensations practices are transparent. Anyone involved in the decision making part of the hiring process should be able to communicate what the company’s compensation philosophy is and how it aligns with the company’s overall values. The people involved in making the offer and negotiating salary or equity should know all the steps and data points it takes to arrive at the final offer. They need to be able to explain the “how” and “why.”
We all know people who “winged” it when it came to hiring and putting compensation packages together for employees in the early days. This may work for a while. However, it’s likely to lead to later adjustments and readjustments as you hire more people. The internal inequities become more visible and it becomes harder to fix with each additional hire. The sooner you think about compensation, specifically how you define your compensation philosophy, the stronger the position you’ll be in to hire and retain the best talent in the market.
Every company needs a compensation philosophy that supports the company’s mission and values. Your compensation plan should be able to attract, motivate and retain employees. You’re going to be in a position to talk about why you are doing certain things as a company and need to be able to convey these thoughts clearly and consistently to candidates. Some questions to consider:
As you think about building out a team, you’ll want market data to ensure you’re making hires within the right salary bands. It’s much easier to have a conversation with a candidate when you have market data vs. what you’ve just heard from your peers. Creating salary bands with multiple seniority or experience levels early on will help navigate tricky internal equity discussions down the road. Additionally, as you make more senior hires there will be fewer adjustments on both cash compensation and equity.
Develop a compensation structure with pre-set levels and corresponding bands for salary and equity to minimize subjectivity.
is a great place to start. Let’s say you need to hire your first Sales Engineer in San Francisco but you don’t know where to start in terms of figuring out how to pay this person. You can look up, by title, what someone in this role makes and then refine further by any of the following: location, years of experience, education and number of direct reports. The results will show different percentiles ranging from 10th to 90th. This makes it very easy to create a salary band for Level 1 of a Sales Engineer, for example, and then build out different levels as the team grows.
Promotions/title changes need to be tied to the salary ranges in corresponding levels or bands. There may be exceptions to the rule. Create an exception process with a clear approval process. Do the hiring manager and the hiring manager’s boss need to be included? HR or Finance? Map it out and make sure the process is clear. The important thing is to make sure the same process is followed every time you go through the compensation and/or promotion process.
We have developed our own philosophy around compensation at Homebrew based on experiences at different companies and our values around compensation and equity.
We believe in paying market average salaries (based on the phase of startup you're leading) and “over-equitizing” early employees to provide a compelling compensation package and strong alignment of interests.
Why do we recommend over-equitizing early employees?