Impact Driven Compensation System - How Coda Runs Comp

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Impact Driven Compensation System - How Coda Runs Comp

Impact Driven Compensation System - How Coda Runs Comp

Getting Started

Kenny Mendes

Discover Coda's innovative level-and-role-independent compensation structure and calibration system. You can implement it using this guide and template.

Most tech companies today use the traditional levels-based compensation system, often referred to in HR circles as the Google compensation system. This model categorizes roles and assigns specific compensation targets for each level. When an employee joins, they are placed into one of these levels, focusing primarily on “How do I get promoted? How do I advance to the next level?”

This endless cycle, with its inherent drawbacks, is prevalent across the spectrum—from startups with fewer than 50 employees to the largest global organizations. It’s also a never-ending hamster wheel for employees.

Many CEOs and HR leaders have become desensitized to the pitfalls of this system, overlooking its impact on lost productivity, poor retention, and outdated processes. There’s a common misconception that the levels-based system is the only way to manage compensation efficiently, equitably, and systematically at scale.

Your compensation philosophy is crucial for recruiting and retaining a world-class team and driving the right behaviors from your employees. Given the importance of your approach, it’s worth considering a fresh perspective.

Imagine a new compensation philosophy with the following merits:

🚀 Prioritizing team success over individual needs: Employees can focus on work that maximizes team and company impact without being preoccupied with individual accolades. They feel like true owners of the company, understanding the significance of their equity awards and realizing that the quickest way to enhance their compensation is through driving business success. Read more on Coda’s approach to offers

here.⁠

⁠

🗓️ No performance review season: Productivity for an entire quarter doesn’t grind to a halt because it’s time to write performance reviews.

🛠️ Valuing Individual Contributors (ICs): The compensation system supports the idea that being an IC is just as rewarding as being a manager. Great ICs can continue to excel in their roles without pressured to become managers. Managers are rewarded for their leadership, but there’s no additional premium for being one. In fact, inversions are possible! ICs on a team can be paid more than their managers, or even their managers’ manager, based on the impact they drive.

⛔️ Eliminating Titles: Everyone is an engineer or product manager or designer, etc. There’s no concept of senior or staff. Great ideas can come from anywhere, and since there’s no concept of titles, there’s no need to manage egos concerned about titles. If you want to read a great post on this idea, click

here⁠

💪 Driving Best-in-Class Retention: Your compensation philosophy fosters a sense of ownership among employees, influencing their behavior positively. They focus on maximizing the company’s success rather than climbing the next rung on the ladder.

Intrigued? Let’s dive into how it works.

Key Principles

At its core, this is a role-and-level-independent compensation system.

In a world where market rates often define compensation based on functions and seniorities, this system diverges by focusing on internal impact rather than market benchmarks. Here are a couple of examples:

Sally, a Software Engineer: Sally joins the company straight out of college. Two years in, she significantly outperforms her peers, many of whom have much more experience. Consequently, Sally’s compensation reflects her impact, often surpassing that of her more experienced colleagues.

Frank, a Top Recruiter: Frank consistently brings in the most impactful hires. In most companies, his compensation might align closely with market rates for recruiters. However, in your company, Frank’s compensation exceeds that of many engineers due to his substantial contributions.

Both Sally and Frank receive competitive pay without navigating the lengthy process of climbing hierarchical ladders or considering job changes to accelerate their compensation. Their high-impact performance is recognized and rewarded accordingly.

Compensation should correlate with impact, not tenure or experience.

Consider this: if you had to rebuild the team from scratch, how would you do it?

A crucial component of this approach is a dream team ranking. As the CEO, ask yourself, “If I had to rebuild this company from scratch, focusing on future goals and challenges, who would I prioritize?”

This involves a stack-ranking of your entire team, sorted by their forward-looking impact. Here’s a simple way to execute this across any team size:

You will now have nine boxes. The first box, Box 1, represents your most essential team members—those whose departure would cause significant concern. Box 9 includes your least impactful members, who might be under performance management or close to it. To see this in action, click

here⁠

Each person will have a calibration score, and over time, you’ll observe how they move within these groups, creating a calibration history.

It’s important to note that critical team members can exist in all groupings. Even those in the third grouping (e.g., buckets 7 or 8) can be highly valuable and should be motivated and compensated fairly. However, their compensation may align more closely with market rates.

Compensation is run by a small, centralized committee. (Not by managers or VPs.)

At Coda, this committee includes six people: the two co-founders (CEO/CTO), COO, Chief People Officer, Head of HR, and Head of Recruiting. These individuals are deeply involved in the entire employee cycle and thus adept at navigating this process thoughtfully. They bridge market dynamics with individual performance insights and team success.

The biggest input for this compensation system, however, is from our org leads, who help drive each employee’s calibration score, which we’ll dive deeper into below.

Key Point: This is not a manager/VP-driven comp process, and inversions are possible.

Compensation is inherently out of scope for VPs and people managers. They have no visibility whatsoever into an individual’s compensation.

There’s a primary reason for this: inversions can happen. This means an IC can be paid more than their manager. In traditional compensation systems, managers set compensation for their team, and thereby make more than their reports. As a result, most people try to become people managers to drive up their comp.

A subtle but meaningful advantage for org leads and people managers at Coda is that if they ever receive questions or complaints about compensation, they can redirect the person to our head of HR, and it’s up to the compensation committee to make sure their approach is sufficiently retentive.

Decoupling compensation updates from performance reviews.

This compensation system can be run annually, biannually, or quarterly. Managers can conduct 360 reviews on their preferred schedule, while the lightweight 9-box calibration exercise is conducted quarterly. This approach prevents the entire company from dramatic slowdowns in productivity for performance evaluations and peer feedback, allowing employees to remain focused on their core responsibilities.

How to Run It

Step 1: Run your 9-Box calibration exercise.

Running it as a small company: When Coda was sub 75 people, we were able to ask each member of our leadership team to calibrate the whole company. We then created a merged list, and displayed the results, sorted by the standard deviation. This allowed us to highlight cases where we disagreed the most, surfacing questions like, “You ranked Sam a 7, but I ranked him a 2. Let’s talk about why.” This process allowed us to crystallize what we valued the most/least in employees and surfaced cases of fast performance spikes or drops.

Running it as a larger company: As the company grows, it becomes impractical for the leadership team to calibrate everyone. With more middle managers closer to individual performance, you start with manager-level calibrations. For example, if you have three engineering managers, each calibrates all engineers. Then, the Head of Engineering merges these calibrations, and managers discuss any ranking differences. Finally, work with your leadership team and compensation committee to create a consolidated list across departments, so you have one final list of your whole company.

Step 2: Compare Total Compensation and Make Recommendations

Compare total compensation for individuals in each calibration bin and recommend adjustments. Ensure employees are above their If-Hired-Today (IHT) numbers and have comparable total compensation within their calibration buckets.

Goals:

Similar total compensation for people in each box: Ensure similar total compensation for an engineer, product manager, or marketer in the same bucket, even if their salaries differ.

Compare against their (If-Hired-Today) number: IHT is a rough comparison to what fair market rate would pay that person for their role. If someone might expect a 4-year package of $1M, or $250K per year, what is the sum of [4 * their salary] + [unvested equity * current stock price].

An individual’s IHT is calculated by their Pay Bucket. You may need to adjust an employee’s pay bucket up as their impact increases.

It’s often easiest to run this process department by department, and then do total-compensation checks across all departments.

Your goal is for compensation to be comparable, not equal, and you may have justifications for why people are not being brought up all the way to the rest of the group. For example, if someone was in bucket 6 but jumped up to bucket 2, you’ll want to see that level of impact sustained over a longer period. You can give them a very meaningful comp bump, but don’t necessarily have to get them all the way up to bucket 2. As they sustain performance, you can continue to give very meaningful increases that get their IHT higher. total compensation with salary and equity.

Step 3: Run your Equity Checks and Employee Perception Checks

Individual compensation perception checks: these checks are designed to ensure the person’s compensation update will feel meaningful and motivating.

Check against this individual’s initial award

Check against their previous award

Check against peers in similar roles/performance buckets, in the event people share their compensation with peers. Note, differences are definitely OK (ex. two engineers in very different impact buckets), but assuming performance and role is similar, ensure no major disparities in compensation.

DEI Checks: these checks are in place to guard against potential biases

Check across genders with similar calibration scores, levels, and functions

Check across ethnicity/race groups with similar levels and functions, including checking BIPOC vs White calibration. Depending on your team size, you’ll be able to achieve different levels of granularities.

And finally, go through these checks looking at a combination of ethnicity/race + gender to make sure any particular group isn’t treated differently. It’s also important to check your calibration scores from managers or org leads for bias.

Step 4: Deliver the Offers

One of the hardest parts of this process is that you have a small number of people who can deliver these updates - only people inside the compensation committee. At Coda, this means a sprint for 3-4 people in our committee to deliver the 150 offers over a span of several weeks. However, we’ve turned this process into one of the most informative looks for our leadership team into how the company is operating. Our team will use these conversations to first check in on how the employee is feeling about their own role, their team’s performance, and the company performance. We’ll dig into what factors are working well or poorly. We’ll then relay these insights back to their manager, org lead, and our founders.

⁠

FAQs

How did this system get created?

Shishir Mehrotra, founder/CEO at Coda, developed this system when he was leading YouTube. Since YouTube was a part of Google, he had to receive special exemption from the Google founders to run comp this way, and as a result, was forced to manage his own system in spreadsheets. The pain of running these complex compensation and calibration processes in spreadsheets was partially the inspiration for Coda!

How do you define impact?

A variety of performance inputs. While managers are the main source of input, they aren’t the sole source. We also take into account peer input, input from other leaders, and value concrete examples of performance and cultural impact in these evaluations.

An employee jumped from Box 6 to Box 2. Do I need to get their comp all the way up to other peers in Box 2?

No. You’ll want to give them a very meaningful comp bump, but it’s important for you to see that person score high in that calibration bucket over multiple calibration cycles. You can step them up into that comp range over time.

Does this system scale as you have a lot more employees?

Yes. In fact, Shishir Mehrotra ran this system at YouTube with over 1,000 employees. The major change is that over time, you lean much more on manager inputs and cross-manager calibration sessions to establish department-specific calibration scores, while in the early days, the leadership team can often accurately calibrate the whole company.

What do I say when a candidate in the recruiting process demands a title?

Hold the line. Explain the philosophies of why you don’t have titles, and why this is better for company performance, and their own financial success is greatly tied to company performance. We’re much more worried about maintaining this internally across our company as opposed to externally. For example, we’re very flexible with what people can put on LinkedIn, especially after they’ve left. We ask people to avoid titles like senior, director. While this philosophy is a bit of a shock during the recruiting process, it’s rarely comes up as an issue for employees.

How do you adapt for an employee’s performance changing over time?

The easier cases are when employees over-perform and you’re able to reward them with higher equity. In other cases, you might mis-slot an employee, where your expectations for impact are higher than their output. In serious mis-matches, this is more likely a performance management scenario. In milder mismatches, you can allow them to vest equity and give them no refreshes or smaller refreshes, just to where their unvested target comp matches up with where you believe they should be. Since there’s no prescribed comp cycle or expectations set on when they may receive their first bump, you may not have an employee issue, or you might have to have a frank conversation with the employee about where their compensation sits and why you feel it is fair.

This Coda template is great! How do I get more for my People teams?

Check out the

Ultimate Recruiting Handbook⁠

and

Ultimate People Handbook⁠

for all the resources you need to lead your People organization.

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