COMPENSATION

What to consider in a Compensation Plan

Things to consider:

  • What are the components of your total comp plan? (see Compensation Overview)

  • When you make offers to new hires, are you open to negotiation or no?

  • How transparent do you want to be internally? Externally?

  • Do you want to post your salary ranges on job descriptions/postings?

  • How often will you review/adjust your compensation plan?

  • How will you handle employees who ask for a raise/comp review outside of this cycle?

External Data — Our Recommended Sources:

  • OptionImpact — 100% free for private, venture-backed companies. Give them your data and get theirs.

  • Radford — paid, ~$15,000-$30,000 CAD annually

  • Interviews! — you should be collecting compensation data live from the market in all interviews/recruitment processes. Store this in a consistent, standardized way for easy reporting and analysis.

Pay Transparency Spectrum

Compensation Overview

  • Ways to Pay

    There are 4 main ways to pay someone, which come together to create a Total Rewards package:

    Base Salary (their regular pay cheque)

    Variable Pay (signing or performance-based bonuses, commissions, etc.)

    Stock Options & Equity

    Benefits + Perks

    All of the above options are tools in your "compensation toolbelt". The value and combination of these tools will vary from team to team and role to role, and what you can/should offer will change as you grow.

  • Your compensation strategy

    The first step is to figure out your Compensation Strategy/Philosophy. This means deciding on how you make compensation decisions across the business.

    The easiest way to think about this is figuring out how you will balance two things:

    What the market says you need to pay

    What makes sense for your business to pay

    You will collect data and use that data as an input to create pay bands or targets. These bands/targets will inform how you make compensation decisions for new hires and existing team members.

    With the rise in remote and distributed work, there is also the added consideration of deciding how you pay across geographies. Your main options are:

    Localized Pay — you pay based on the city someone lives in

    Nationalized Pay — you pay based on the country someone lives in

    Global Pay — you pay the same for a role, regardless of where the person lives

  • Compensation Data (The Input)

    Compensation Data (the input)

    There are 3 main sources of compensation data:

    Public data (public salary surveys from agencies, associations, Glassdoor, etc.)

    Private data (paid salary surveys like Radford, OptionImpact, etc.)

    Live market data (information collected through interviews, employee turnover, etc.)

    You will use a combination of these inputs to create a benchmark, which is the target of where you want to pay.

    This will vary greatly, but a general rule of thumb is that most startups aim to pay at the 50th percentile across the majority of their roles, with key roles being paid higher and lower-impact roles being paid lower.

  • Compensation Bands/Targets (the output)

    Based on the data you collect, you'll determine what your business can afford to pay. This can take the form of a single number (a target) or a range (a band). People hired or promoted into a role will be paid according to this.

Stock Options & Equity

Employee Stock Options are generally an important part of the total compensation plan for startups. This is because you are typically paying less competitive salaries than large, public companies. The stock options are an attempt to "close the gap" and allow employees to participate in the upside of your fast-growing, successful business!

Considerations:

  • Employee Stock Options Pool size — we typically see 10-15% as a standard allocation

  • Vesting schedule — we typically see a standard 4 year vest with a 1 year cliff

  • Expiry window — there is a lot of debate on what the right time period is for expiry windows. "Standard" expiry is 90 days, although we're increasingly seeing more companies extend this to 1/3/5/10 years — see here.

  • Setting Initial, Refresher & Evergreen grants — you need to have a strategy for how many options you grant to employees upon hire, and how you refresh/top-up/supplement these grants in the future based on tenure/promotion/performance/etc.

Things to remember:

  • you need to include Stock Options as part of your overall Compensation planning — this means standardizing grants, looking at pay equity, etc.

  • if Stock Options are a considerable part of your total comp package, you need to make sure that you are "selling" them appropriately to candidates, and educating current employees on how they're valued and how they work

Basic Options/Equity Info for Employees:

When a startup is formed, it has a set number of shares. A portion of these shares (normally 10-15%) are set aside to be granted (given) to employees as options — this is called the Employee Stock Options Pool (ESOP). The rest belong to the company or are given to investors in exchange for funding (money) that's been raised.

Your options are a guarantee that, in the future, you can buy the company's shares at a set cost. These options are vested (earned) over a set period of time. Once they've vested, you are able to exercise (buy) them and become an official share-holder in the company.

  • What are Options and how do they differ from Shares?

    • Options are the right to buy common shares of the company in the future at a pre-determined, guaranteed price.

    • Your options are not shares until you buy them. They are the right to own a piece of the company in the future.

  • RSU - Restricted Stock Units

    • tax is less favourable in Canada for RSUs

    • a piece of the company, no cost to the employee but still have a vesting schedule

  • What is a strike price?

    • The price you pay to exercise (buy) your options and convert them to shares

    • Determined by the fair market value (FMV) of the common shares/company value when your options are granted to you (which is normally determined through a process called a 409A). This is the price you need to pay when you decide to exercise your options. The strike price doesn't change once your options are granted to you regardless the valuation of the common shares

  • What is a vesting period? How does it work? Can I shorten it? What happens to my vested options if I leave before my vesting schedule has ended?

    • Standard vesting is over 4 years with a 1 year cliff. This means you vest 25% after 1 year, and the remaining 75% monthly over the next 3 years.

    • No, you cannot shorten it — vesting periods are standardized throughout the company.

    • When you leave, you have a set period of time (expiry window) from your last day to exercise (buy) your vested options. If you decide not to buy them within that period, you lose them.

  • When will these be worth something?

    • The most common way that options become liquid (worth real money) is via an exit:

      1. IPO - if the company goes public and lists on a public stock exchange

      2. Acquisition - if the company is purchased by another company (acquisitions mean your shares are bought from you, either with cash or with the acquiring company's stock - or a combo of the two)

    • Options can also become liquid via a secondary market or secondary offering:

      1. This could be an event where current investors are looking to buy shares held by other investors and employees

      2. This could be an event where the company is looking to buy back options/shares it has issued

  • What are the classes of shares? What do they mean?

    • Different classes have different values and pay-back terms

      1. Preferred Shares - most favourable rates - protects early investors

      2. Non-voting Common Shares - most employees

This article by Canadian tech founder David Hariri gives a good overview of employee stock options as well.

Talking Compensation

Compensation conversations can be awkward, but avoiding them or not being transparent during them will only cost the company more money and you more time so it’s better to figure it out early.

Remember we’re not out to take advantage of our candidates, we want them to feel valued, financially secure and paid fairly when joining us. The old adage of “well if they tell me they want 60k and we were going to pay 70k, but now we’ll pay them 60k” is no longer. Pay equity, or lack thereof, can sink a company in a matter of minutes, so don’t take advantage of people.

You can no longer ask candidates what they currently earn, and to be honest, it doesn’t matter.

Here is what matters;

  • What do they need to see compensation-wise to make a move?

    • The market is competitive right now, often times we need a candidate way more than they need us, so lets understand what they need in order to make this move.

    • Understand what the whole package is:

      • Ask them to break down what a competitive package would look like to them

        • Base Salary

        • Bonus Potential

        • Options/Equity/RSU’s

        • Vacation

        • RRSP, etc…

        • Keep in mind that people often view their pay as more than just the base salary number

How to share our compensation package

  • Transparency

    • We should have a compensation band for a role if we’re interviewing for it, so there’s nothing to hide.

    • Share the range we’re looking to pay and explain how we got there

      • Ex: We’re an early stage company right now and can’t afford top of market but can help offset some of that comp difference with options. At this level we offer options of XX.

      • Be clear that we follow compensation bands based off of data, and do this for internal pay equity reasons

How to manage a conversation if we’re way off?

There are two types of “Way Off”

  1. The Delta is just too big

    1. You’re paying $90k and they are asking for $165k.

      1. That's a bridge we won’t likely be able to find a middle ground on. It’s better to be clear about that and if you really like the candidate let them know you’ll keep them in mind as we continue to scale. Even if a candidate is “shooting their shot” thats a $75k delta, maybe they’d be ok with $140k but that's still way beyond what you can push a payband to.

      2. Take note of what they are asking in the ATS, understanding where the market is from real time interviews is the most precious compensation data you can track

  2. We’re below Market and they are at Market

    1. We’re paying $90k and market is closer to $120k

      1. This sounds like a huge Delta but it’s really not. Many early stage companies pay below top and mid market (think around 30-40th percentile of market).

      2. Don’t say no, let them know it’s higher than we were looking for and gather some insight on what the total package is. Once you meet a few more people you may quickly realize you’re not going to be able to pay 30% of market for certain roles, and your compensation will come up and you may be able to meet in the middle.

If you reject someone based on compensation, tell them that. “We really enjoyed meeting you and thought you’d be a great asset to our team, however we just cannot meet your compensation expectations at this stage in our growth. I hope we can stay connected and hopefully will have the opportunity to revisit this as we scale”.

Candidates will appreciate the transparency; some may be so excited about your business that they will try to make a way for this to work, but more than anything they will have a positive experience and be more likely to join in the future and recommend future people.

Unsure how to handle the conversation? Say this!

  • For a Brand New Role in the Org. “Our Talent team is still doing their research on the appropriate compensation band for this role, I will make sure someone follows up with you once it’s been established. If you’re comfortable sharing what you’re looking for I would be happy to share that with them to include in their data.”

    • Don’t make up a number or commit to being able to match what they’re asking for.

  • For an already existing role in the org: “I am actually not entirely familiar with the compensation bands for across the team, let me loop back with our talent team and get back to you”.

Things you need to erase from your mind

  • “If they really wanted to work here they wouldn’t focus on salary”

    • FALSE - they don’t have skin in the game, they have bills to pay and mouths to feed. Just because this is your baby doesn’t mean it’s theirs — it’s a job. If you were interviewing for a job at a company you would expect to be paid what you wanted / what was fair as well

  • “If they won’t tell me what they want to make I won’t tell them what we’re paying”

    • FALSE - That’s super toxic, you want them to commit 40+ hours a week to you, 2080+ hours a year to you, they deserve to understand what the compensation package looks like. It’s up to us to build a clear and transparent compensation philosophy and share it with them.

  • “When I was at their level I made $50k”

    • SO WHAT? - inflation and demand for talent is at an all time high, the competition for great talent is massive and salaries have gone up. Whether you earned $50k 3 years ago or 10 years ago is irrelevant. If we cannot pay it that’s fine, but we don’t drag people down to make us feel better about our decisions.

  • “BUT OPTIONS!” - Lets be honest, options are fake money until they are real, and most companies don’t have a liquidity event for 8-10 years. Early and mid stage employees want options but often don’t even understand what options are. You cannot pay for rent or food with unvested/unsaleable options. These may be able to help close small gaps or tip the scales, but won’t be viewed as a substantial part of the package most of the time.