Today we’re going to do a whirlwind tour of compensation. Hopefully, you’ll learn a bit along the way. And I’ll share an exercise for managers, called a compensation review.
Some companies use structured pay. Structured pay is when there is a “system” for determining pay:
Structured pay is a spectrum. Most companies end up having some sort of system for pay.
Companies that emphasize fairness and equity also will often implement a more extreme version of structured pay: ”pay equity“:
As a manager, you need to know how pay works.
If the company hasn’t implemented pay equity, then you have to figure out how it works. Here are a couple of variants I’ve seen:
Your homework is to figure out how your company’s system works. Is it structured? Is there a formula for how salaries are computed? Do you have salary ranges?
Companies have to make a philosophical choice in how they pay. They can choose:
Each of these has tradeoffs:
People tend to be pretty ideological about which of these is best. But the important thing is you need to understand how it works at your company.
Most companies will have a list of locations you can hire from. The reason for this is that companies have to do paperwork and taxes for every location they have employees. And sometimes there can be additional legal ramifications for having a “presence” in a location.
There are companies that help minimize the overhead of this. But it’s still an issue, so you need to be aware of the locations of your team members.
Because of these factors, an employee moving to a new location can be a “problem” you have to work through with your People Ops / HR team. And you may not be able to hire people everywhere you think you can. So consult with your People Ops team when hiring.
Generally, companies will be willing to incur the overhead for existing employees, but there are times companies will cut ties with an employee rather than deal with additional legal requirements.
Note that the differences between locales is very different between regions within a country, and between countries. The burden of dealing with international relocation, visas, and taxes can be so large that many companies will not bother to address them.
Finance usually provides a budget to each department. Depending on the size of your company, you may or may not have much interaction with the budget. But even if you don’t know it’s there, the budget is a hidden force that drives a lot of decisions.
Companies generally have a certain amount of money they can spend on hiring employees, promotions, and cost of living adjustments. Usually, that pool of money is determined by Finance.
That pool of money for employee salaries can be divided into buckets (“salary”, “promotions”, “cost of living adjustments”). But it may not be.
Generally, budgets are zero-sum. If you give more raises, you hire less. If you give the larger cost of living adjustments, you promote less.
You’ll see a lot of people that talk about how things “should be”. But the reality is that that is how it works in most companies. You can sometimes get exceptions, but the money has to come from somewhere.
One thing to be aware of is that saving money somewhere can often justify spending it elsewhere. As a frontline manager, you probably won’t be in a position to be making a lot of these decisions, but understanding how it works can help you if you want to advocate for change.
Most companies have engineering “ladders”. They describe the difference between a Software Engineer and a Senior Software Engineer. And they outline the criteria for advancement between these levels.
Companies do this for a number of reasons. What you’re probably familiar with is their use to help guide career discussions. And to attempt to create an objective standard you can make promotion decisions around.
What you may not realize is that companies use these ladders for another purpose. They use them to determine salary. You may think, “of course they do”. But there are companies out there that provide salary information. By creating a ladder, and defining what is in that ladder, your HR people can match up your company’s levels to what is done for the whole industry.
This is complicated because engineering titles are not equivalent across companies. A senior engineer at Company X does not equal a senior engineer at Company Y. So these companies have detailed ways you can map your titles to theirs.
Many companies also use salary tools, which attempt to compute a salary based on a job description and a bunch of keywords. These tools aren’t perfect, but they are an attempt to use data to make sure compensation is fair.
Larger companies will have a dedicated compensation person. Their job is to determine compensation for all the roles in the company.
Companies generally target a “percentile” when choosing what salary to pay.
So you might hear a People Ops person say something like, “we target the eightieth percentile for salaries”.
What this means is that in each market you’re competing in, you’ll use data to determine the salary ranges. You’ll use the distribution of salaries to determine what to set the salaries you offer.
For companies that are not geo-based, this means you’re competing in a global market. Many geo-blind and geo-balanced companies don’t attempt to compete in expensive markets like San Francisco, because that means they’re paying a very high rate for employees everywhere.
Compensation is a set of tradeoffs that companies make. They have to juggle business needs, market conditions, the employee experience, and growth and performance management.
For example, a company can offer a higher salary, but not promote its employees as quickly. Or it can choose to give more money for promotions, but not be able to hire as many people.
And, of course, each company chooses what budget to make available for hiring and promotions.
These factors are invisible to most people. But they explain why you see things like a low promotion budget, but rapid hiring. They’re optimizing to bring more people in. But trading that off against future employee turnover.
The definitive guide to equity compensation is the Holloway Guide to Equity Compensation. I recommend you read it carefully.
You’ll need to have conversations with your team about equity, and understand it is beneficial in its own right.
A couple of things to remember:
So, now let’s talk about the compensation review exercise. Here are the benefits:
But before we start, let’s make sure you can do such a review.
Doing the review is actually pretty simple. I have a template you can copy and adapt to your purposes. Fill it out for every member of your team. Highlight in red the things that stick out as most problematic.
Look for edge case scenarios
Once you’ve done the compensation review, you’ll probably notice a few things that seem off. Your next job is to dig into that. Are there legitimate reasons for those anomalies? Or are they something that needs to be fixed? Make these changes as quickly as possible.
I’d like to thank Zen Mak (founder and CEO of RallyWorks) for her feedback on this post. And I’d also like to thank Bailey Douglass (founder and CEO of Second Principles). Bailey is working with companies for free to come up with policies to support medical travel for team members who need it in light of the Roe v Wade leak. Bailey gave a ton of feedback on this post and helped improve it significantly.
This is part of my engineering management bootcamp newsletter course.