Today's Edition

• From Friction to Flow: How to Perfect Your Startup’s Pay Bands

• The Grove Conference '24

🚀 From Friction to Flow: How to Perfect Your Startup’s Pay Bands, with Calvin Croskey

Last week, with the help of Calvin Croskey, we explored the critical role of a well-defined salary structure for startups. We discussed how competitive and transparent compensation can eliminate hiring friction and align your team’s motivations with the success & vision of the company.

Now, in this special Part II edition, let’s dive deeper into the factors that influence the need to refresh salary structures, the impact of updating pay bands effectively, and the benefits of a proper implementation.

Why it matters: We’ve defined what a salary structure is and what it does. So why is it important?

Implementing a formalized salary structure allows organizations to bring simplicity, standardization, and transparency across the company, while being scalable to meet the needs of a constantly changing talent environment.

We’ve found that when startups get this right, 8 key value adds happen:

1. Pay Transparency: Clearly defined salary ranges allow for the opportunity to promote openness about compensation structures, fostering trust and understanding amongst your employees.

2. Talent Attraction & Retention: Having competitive salary ranges helps attract top talent and retain experienced, high-performing employees, as they see the value in their compensation.

3. Equitable Compensation: Salary ranges create the idea of guardrails, enabling fair and consistent pay practices for similar work reducing the likelihood of wage gaps and promoting equal pay opportunities for all employees from the start.

4. Employee Engagement: If employees know (and more importantly understand) their earning potential, this can create a feeling of personal motivation and engagement to deliver results.

5. Budgeting & Financial Planning: Establishing formal salary ranges aids in the budgeting for HR expenses related to hiring, pay increases (e.g. focal cycles), promotions, and any other type of compensation related process.

6. Performance Management: Salary ranges provide a framework for linking pay to performance, facilitating a structured approach to performance reviews and merit increases.

7. Market Competitiveness: Regularly reviewing and potentially adjusting salary ranges ensures that compensation remains competitive with your industry and respective comparator group, helping the company to attract and retain top talent.

8. Legal compliance: Having well-defined salary ranges helps companies comply with labor laws and regulations, minimizing the risk of legal issues related to unfair pay practices or lack of pay transparency.

Take a closer look: Let’s say you’ve established your salary structure – the next challenge most startups face is identifying when or why to make changes to something they spent a ton of (valuable) time establishing already.

Here are 4 factors to look for and examples of each:

1. Organization Driven:

• Change in compensation philosophy: Shifting from seniority-based pay to performance-based pay would require a total salary structure overhaul.

• Expansion to a “hot” or New Market/Talent Pool: A Traditional SaaS company expanding to AI or cybersecurity markets for the first time would need to adjust salary structure to reflect the supply/demand in these fields.

• Targeted Focus on Hiring Top Talent for a New/Specific Function: Building a brand-new product line could require experts in that particular field. Hiring a full team in an undefined pay band/job family would require a refresh.

2. Company Inflection Points:

• Pre-IPO Readiness: Aligning compensation (especially executive compensation) with market standards and organizational strategy is critical prior to an IPO given the level of scrutiny public companies face. Also, ensuring equity distribution is fair, pay is market rate and motivating, plus ensuring the compensation structure is sound & attractive to potential investors is another piece of the IPO preparation puzzle.

• New Material Company Valuation: A fresh round of funding and buzzing press about a significant increase in valuation can lead to a reassessment of compensation guidelines, namely equity practices. Higher valuations often mean the company can pay higher salaries, and employees know this.

3. Market Driven:

• Increasing cost of labor in particular locations: Especially difficult for remote teams, adjusting to the cost of labor and cost of living in key areas may require a refresh of pay ranges across the board to ensure employees aren’t priced out or paid significantly more/less than their counterparts living in different areas of the country

• Macro-economic Environment (i.e. inflation): Purchasing power has been eroded by high inflation, so to maintain morale & retention, consider adjusting bands to keep pace.

4. People Driven:

• Candidates declining job offers at a high rate: If there’s a trend here, something’s wrong. This is the easiest & clearest signal that salary structures need a review if top tier candidates are consistently declining due to comp hesitations.

• Employees perception pay is low (via engagement surveys): If you don’t know, ask. Regular surveys can reveal how employees are feeling and addressing their qualms regularly builds trust & drives retention.

• “Buy”, “Build”, or “Borrow” hiring strategy (competitor rates): Hiring externally, developing talent internally, or using contractors (or a combination of the three) will dictate what the company needs to do to remain competitive with the market. Each bucket will determine if how you prioritize cash, benefits, and equity comp.

Takeaways: A robust & well-defined salary structure isn’t just a tool for managing payroll. It’s a strategic approach that aligns with the vision & interests of the founders, employees, and investors.

For founders, it sets a strong foundation for company culture & operational efficiency. It makes scaling & adapting much easier when comp practices align with the vision & growth objectives.

For employees, transparent & fair compensation is the basis of trust. It incentivizes achievement with a clear pathway for career development, boosts morale, and reduces turnover; therefore, reducing significant costs to the company for having to rehire or retrain a new team.

For investors, well, it’s their money! They’re reassured by a well-structured salary structure that meets regulatory requirements (if applicable) but also signals a pulse on the market to ensure the company is offering market aligned rates and spending previous capital wisely. It makes future fundraising easier when the due diligence process shows the house is in order with clear scalability guardrails.

For management and other key partners (e.g. talent acquisition, HRBPs), salary structures provide a clear and transparent range of pay the company believes in good faith it will offer to employees and candidates. It’s a tool for them to leverage when making merit and hiring decisions to enable operational efficiency and sound judgement.

Next week, we’ll dive into the band refresh process, along with some recommendations, and what a successful implementation/execution looks like.

In the meantime, read more on the topic from Calvin on his blog, 5 Qualities of an Effective Total Compensation Program.

Questions about your own startup’s salary structure? Reach out to myself or Calvin.

🌲The Grove Conference ‘24

Sequoia clients! Join us at The Grove Conference 2024, our premier annual client event, to connect and learn with peers, thought leaders, and the Sequoia team.

Hear from industry experts and leaders from top people-driven, tech companies who’ve approached these same concerns and developed thriving programs. You’ll also hear insider announcements on what’s next from Sequoia, our key partners, and vendors.

Plus, choose from three breakout tracks that cover:

• Compensation Strategies

• Benefits & Compliance Strategies

• CxO Conversations

Thank you for reading and joining on this journey with me!

Please reach out with any feedback about future topics you’d like to read about.

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👋 Quick about me:

I’m Cris Cafiero, and for nearly a decade, I’ve collaborated with founders, CFOs, and people leaders of early-stage, venture-backed startups. As an ex-Zenefits, ex-ADP, and now Business Consultant for Sequoia, I help startups build scalable people management infrastructure and maximize their people investment through compensation & benefits strategies.

Based in LA, I share my life with my wife and our two dogs. I’m into NBA drama, Marvel, reading, video games, computer-building, real estate investing, and lifelong learning.

I care about helping startups build a thoughtful, people-first culture and hope you find the topic as interesting as I do.

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