A compensation philosophy defines how a company plans to pay and reward employees based on a set of principles and values important to them.
Main components for designing comp philosophy:
Culture & Values
How much should you share with employees with regards to compensation? Keep in mind, it’s not all or nothing! Transparency around comp is a continuum. Below are the various levels of transparency:
💡 Tip: If you are developing a comp philosophy for the first time, keep it the “What” and “How”. Employees want to understand the rules of the game -- when is comp reviewed, what are they being evaluated against, factors taken into consideration in the comp increase decision.
Equality in Pay
Equality in your compensation practices will help in building trust with employees. In addition to the fact that it is the right thing to do and good business practice, it’s also the law. We encourage you to reach out to an employment attorney for more specifics.
Compensation can be different for employees in similar roles if it is for one or some of these legitimate reasons:
In summary, both laws require men and women in the same workplace be given equal pay for equal work. The jobs need not be identical, but they must be substantially equal. Job content (not job titles) determines whether jobs are substantially equal.
💡 Tip: We recommend completing a pay equity analysis at least once a year. The purpose of the analysis is to ensure that you do not have any pay equity issues and comply with the law. Please reach out to an employment attorney to ensure the analysis is under Attorney Client Privilege.
Majority of companies that raised $50M+ have formal comp bands. It’s never too early to put together comp bands. We recommend that you formalize leveling and bands when you reach 50-100 employees.
The most commonly used performance review tools are:
For early to mid-stage companies, we do not recommend implementing a cash bonus plan (for most companies although there are always exceptions). We are seeing a shift back towards being cash-flow positive before implementing a formal cash bonus program (not limited to only companies in our portfolio). There are several factors to take into consideration to determine readiness for a formal, company-wide bonus plan:
Stage of company
Financially: Ratio of revenue to total capital raised; cash flow positive
Philosophically: Do you believe bonuses will drive performance?
Operationally: Ability to forecast accurately 12 months out; systems and processes in place to measure and track progress against goals
💡Insight: Cash bonus plans are more prevalent in late stage companies because they are often competing with public companies on compensation in the form of higher salaries, cash bonus plans, and stock that can be sold in the open market.