When your company is a startup, employee compensation may be arbitrary or based on equity and other offerings. As you grow, however, you want to set up a company-wide compensation structure that supports fair wages and competitive offers.
In this article, I will describe how to set up base pay structures.
Analyze Your Startup
Before you think about how you want to pay your employees, figure out what your compensation structure will do. Do you want it to attract or retain employees? Motivate or reward?
Evaluate current employees and their competencies. Consider what non-monetary benefits you offer, such as free lunches or transit.
In the market-based evaluation stage, you want to learn as much information as possible in regards to other companies. Collect salary information from the industry of each job. In addition, collect information from companies of the same size, assets, and geographic area.
Check the National Compensation Survey for national, census region and local areas. Use this information to compare an internal job to an external job of similar content. Keep in mind that location is very important when determining salaries. This is because of the variable cost of living, and also because you want to offer a competitive salary.
Inquire with competitors and other startups in your area to see how much they pay for various positions. Ask for ranges on Quora and job-specific Q&A boards. Search online for salary information. Use the following tools:
Internal Equity, or Pay Grades and Ranges
Now you group jobs with similar importance to the organization. Groups are then assigned a pay range, which includes the upper and lower limits of possible remuneration.
Lower-level jobs have a narrow pay range because entry-level positions tend to promote and advance rapidly. Higher-level jobs, however, are usually maintained at a certain competency for a long time. To see an example of pay grades and ranges in action, check out the Federal Job Salaries Grades and Ranges.
When assigning pay grades and ranges, make sure there is an overlap between ranges. This is so an experienced employee in a lower grade can receive higher compensation than an inexperienced employee in a higher grade.
Broad-banding is the act of combining several pay grades with narrow ranges into a larger group. While not relevant for small organizations, broad-banding is an important technique to remain aware of. Here are some situations where broad-banding comes in handy:
- If your startup grows much larger and overly complex pay structures emerge
- If you wish to flatten your company by removing levels of management
Keep in mind that your overall competitive offering to employees will include bonuses, performance-based incentives, benefits, perks, and paid time off.
Always communicate any changes to compensation with your employees.
Regularly review your compensation structure to make sure it is fair, competitive, and current.