For young VC-backed companies, a compensation plan often means offering whatever it takes to fill key roles and get folks to join an amazing, yet unproven, company. But as startups quickly learn, things get more complicated as you scale, including compensation.
Although there’s no magic bullet to mitigate all the challenges and complexities that come with growing a company, a well-constructed compensation philosophy can play a crucial role in navigating employee pay.
A compensation philosophy is the north star for all pay-related decisions and is especially important for startups who are tightly managing cash and equity. While every company should have one, a comp philosophy is unique to every business and should evolve as the business grows.
But how do you know when it’s time to update your comp philosophy? Read on to learn the general approaches to different business stages, and key times for businesses of all sizes.
What is a compensation philosophy?
A compensation philosophy (or pay philosophy) is your company’s plan for paying and rewarding its employees compared to the market. It defines things such as overall program guiding principles, key compensation policies and practices, target market positioning for cash and equity, and a vision for the use of short- and long-term incentives. It also addresses how company and individual performance will factor into all of this.
Here’s how comp philosophies change as companies grow.
Early-Stage: Seed Stage or Series A
We all know the truth about this stage. Typically, you have fewer than 50 employees and are conserving cash. It’s challenging to create salary bands and comp is often up to leadership discretion. Hey, you just need to get talent in the door!
Also, since cash is tightly controlled and considered precious capital by the board of directors, you’re heavily focused on setting and delivering market competitive (or above market, if that’s your philosophy) equity compensation.
So, at this stage, it’s common to have a quite simple compensation philosophy that’s mainly used to show candidates and current employees that you’re building a plan.
It’s also common for pay philosophies for young startups to reflect goals rather than reality with aspirational language like “Our company aims to pay above market for engineers …” or “We aspire to position ourselves at the market 50th percentile for target total cash.”
Think of it as setting a foundation that you’ll build on as you grow. The key is to set up a starting point for making general pay decisions and communicating pay to your employees — even if the plan is very fluid. Some direction is better than no direction.
Mid-Stage: Series B and Series C
At this point, your headcount is over 100, you’re seeing real revenue, have employees who have been with your company for a couple of years, and your company may now be subject to pay transparency regulations in certain states and cities.
This is the time to build more structure around your compensation philosophy and internal pay programs and policies so you can make comp decisions with more efficiency and consistency. This means documenting all the things you’ve likely added to your comp strategy since you’ve grown, such as:
- Job levels and pay ranges
- Equity award and refresh guidelines
- Short- and long-term incentives
- Merit awards
The key to refining your compensation philosophy at this point is hard market data. Do you know if you’re currently underpaying or overpaying your staff? Benchmarking your compensation against relevant and fresh market data is the best way to know whether your pay is competitive and realistic.
Leadership buy-in on your compensation philosophy is another key element. That’s a lot easier to win with market data in hand.
Late-Stage: Series D+ or Pre-IPO
In the eyes of investors and boards, you’re likely now (or on the verge of being) considered a “mature” startup preparing for some type of exit event, such as an IPO, merger, acquisition, or sale.
Typically, at this stage, cash compensation is more sought after and becomes more competitive based on your defined peer group. And equity is possibly becoming more reserved and is less of a “big ticket” or high-upside factor for attracting and retaining key talent.
You’ve likely built a comp team and are preparing for the public eye. This involves more than tidying up your pay philosophy. You’re evaluating it annually and shoring it up to prepare your company for all the scrutiny and regulations that come with going public.
When Company Size Doesn’t Matter
No matter your headcount or funding stage, there are certain conditions when it’s important to review your compensation philosophy to make sure it’s still serving your company well. Here are the top three.
#1. Changes in market dynamics
Is your compensation philosophy still affordable and competitive? A good time to ask this is when there are:
- Significant shifts to the talent market
- Changes in the macro economy
- Updates to pay laws that affect your company
#2. Changes to your business
Does your compensation philosophy still support your business goals? A good time to ask this is after:
- Strategic business changes like a market expansion
- A merger or acquisition
- Disruption in your industry
- Significant company growth
- Significant increase in valuation
- Increased performance or productivity
#3. Changes to your workforce
Is your compensation philosophy still attracting, motivating, and retaining top talent? A good time to ask this is if you’re seeing:
- High turnover
- Low retention
- Negative employee feedback
- Negative candidate feedback
A Path to Business Growth
No matter what phase of growth your company is in, staying proactive with your compensation plan is important. Don’t set it and forget. A thoughtful, adaptable approach to pay not only gives you a competitive edge in attracting and keeping the right people, but also supports your company’s financial health.
How Sequoia Can Help
Whether you need to build a compensation philosophy from scratch, update it with relevant market data, or want help with your overall pay strategy, Sequoia can help. We specialize in helping VC-backed companies make the most out of their investment in people. If you want to learn more, reach out to an experienced advisor.
