Why Your Startup Needs a Compensation Strategy

Growth-stage startups must navigate a minefield of operational challenges while racing to establish a marketplace stronghold without tripping over their own feet. Not easy. This will help.

The war for talent is relentless and increasing in complexity as it becomes global in scope. This is why it’s essential for your startup to have a well-defined compensation strategy. The sooner you develop one, the better. With rapid expansion, employee burnout and disillusionment are real risks. Early mistakes can compound fast as your organization scales, leading to high turnover and lost trust.

Fortunately, the flip-side is also true. A comprehensive strategy aligns compensation practices with business objectives, regulatory requirements, and market dynamics. If you get it right, it will strengthen your competitive position, sustain growth, and mitigate operational risks. The difference can be profound.

What’s in a Compensation Strategy?

A well-designed compensation strategy helps ensure that, as your organization grows, your compensation practices scale while remaining aligned with your core values, goals, and working capital needs. It establishes standards and guidelines for determining salaries, bonuses, equity grants, benefits, and other perks and incentives. A good strategy does all of this consistently across different regions, functions, teams, and roles. This is especially critical for companies competing for talent across global markets with vastly different living standards, inflation rates, or salary growth trajectories. 

What’s more, clear, fair, and transparent compensation practices motivate employees to perform their best. By transparently linking compensation to performance metrics, growth, and advancement opportunities, you foster a culture of high performance, engagement, and collective satisfaction. A robust and transparent compensation strategy also illuminates potential career paths for your best and brightest, increasing the likelihood you’ll retain them long term.

Compensation Strategy Components

So, what goes into an overall compensation strategy? A holistic approach usually includes the following components:

Market Analysis: Benchmarking salaries against industry standards in local markets across the globe to ensure competitiveness wherever you’re hiring. This may include benchmarking certain functions or roles to different target percentiles, depending on their relative importance to the business. 

Geographic Variance: Identifying reliable data sources and index rates for benchmarking local cost of living, inflation, and salary growth trajectories in different countries. You also need to confirm relevant legal and regulatory requirements in any nations where your team lives or works.

Banding and Leveling: Defining standard salary bands for job families, levels, and roles with some flexibility to accommodate circumstances and manager discretion. This system must be aligned with a transparent matrix of job descriptions, qualifications, and promotion criteria. 

Variable Pay and Incentives: Determining the strategic use of bonuses, commissions, profit-sharing, and other incentives to reward exceptional performance and align employee interests with company success.

Benefits and Perks: Offering additional benefits such as healthcare, retirement plans, flexible work arrangements, gym memberships, development opportunities, etc.

Performance Management: Establishing a system for performance evaluation, feedback, and merit-based pay increases to recognize and reward employee contributions.

Equity: Determining the right balance between salary and equity for your company is key. You also need a good tool to help employees understand not only today’s share value (probably low) but also possible future values (hopefully high).

Fairness: Ensuring that pay is fair and equitable across commonly marginalized demographics (gender, ethnicity, religion, etc.). Demonstrating systemic fairness fosters employee confidence in your company and trust in its leadership. 

Pitfalls around Strategic Compensation

People get anxious when you mess with their money. We want to point out a few potholes that can disrupt your startup, so you can steer away from them. Avoid these common mistakes!

Every hire is a unicorn: You figure out the comp strategy uniquely for every major hire. If you’re re-inventing the wheel every time, you’ll end up with a lot of wobbly wheels and slow progress towards your goals.

Trusting fairness to happen naturally: You trust your people to be fair and to make sound judgments. Yet everyone has biases and blind spots. Standardization is key. It doesn’t happen otherwise.

Over-protecting anonymity: It’s natural to want to keep individual pay rates private. You still need a centralized compensation strategy and oversight. Lack of transparency and coordination leads to inequities, underpaying, overpaying, wasted effort, and lost opportunities.

Over-relying on hiring managers: As you grow, you’ll need to hire specialists who understand markets, know how to structure salary bands, and think of compensation and incentives strategically and holistically.

Only thinking about money: Compensation includes far more than just dollars and cents, so be sure to consider the full range of holistic compensation: benefits, flexibility, development, remote work, etc. 

Eyeballing true compensation costs: Underestimating true compensation costs can strain budgets and future planning.

Next Steps

To effectively manage growth, attract top talent, and drive long-term success, your startup needs at least a basic compensation strategy to start with. Get something down on paper ASAP. Even a one pager outlining your core compensation principles will be helpful. As you grow, you’ll need to make it more robust, holistic, and systematic. 

• Founders - make this a high-priority topic in your next meeting with your people team (or whoever is responsible for HR). If you already have a comp strategy, review it. If you don’t have one, collaborate with your team to jot down a few main points and designate someone to flesh it out.

• If you recognize the need for a compensation strategy, but you aren’t sure where to start, that’s OK. We can help. Let’s talk! 

This article was co-written by Wisdom Partners CEO Josh Broward and Partner Mark Scrimenti of Vivid Path Operations, and it is being simultaneously published on Mark’s blog.