In the early days of a startup, compensation is often easier. The salaries are usually smaller, with narrower ranges; there may be a salary cap or even a single salary amount for every employee. As a startup scales, sticking to a low-salary, low-differentiation compensation can make it harder to hire people with cash needs, like those who have to support dependents or pay back student loans. It can also make it harder to hire people who have higher alternative offers, which often includes people with management experience or more work experience.
At 75 or more employees, compensation ranges spread out and more people, functions, and levels enter the company. Establishing compensation bands for job levels based on role, function, and amount of experience, even in early stage startups, will lead to more equitable pay across the company for all employees. This addresses politics and can help to eliminate randomness.
Create clear salary/equity bands with defined expectations for each to create a level playing field and reduce bias. Be transparent about them to fight the gendered and racialized pay gap, which can increase over career lifetimes. 1: 62 percent of women and 60 percent of men working for private employers report that wage and salary information is secret. 2: While there may be no direct link between pay secrecy and pay inequality, pay secrecy appears to contribute to the gender gap in earnings.
Compensation isn’t just about money. Many benefits in the industry tend to appeal to young, single men, and feel exclusionary when they are not offered in balance with a rich mix of other benefits options (e.g., foosball but no childcare). Companies can improve this by supporting employees when they need to take leave, rearrange their schedules, or take other measures to manage their work-life balance successfully.
What are our recommendations
Use benefits to shape company culture and scale them with your company.
Use tools like 1:1s to check in on what is working and what kinds of benefits employees want. Options like paid family, sick, and vacation leave along with health care, equity, flextime, and retirement benefits are common, but push yourself further. Childcare, education assistance, and immigration support can appeal to some members of underrepresented groups.
Smart benefits don’t just attract people to your company and give them a reason to stay. They can also make your company better. For example, someone who needs to come into work early can take the lead on collaborating with a project in Europe, while childcare can allow a parent to stay later when they need to.
Decide whether, and how, to allow compensation negotiation
Negotiating compensation can be a painful and long process for both the candidate and the company. Throughout this process, transparency with the candidate is important. Setting expectations on the timing for receiving an offer can help a candidate decide to hold off on taking another offer as they wait for a company to make a decision. These discussions will set the tone for the future ongoing work relationship.
In the earlier stages of a startup, having one person, like the recruiter, handle all the compensation decisions and negotiations can provide consistency in the application of compensation bands and fairness, provided she is aware of biases and works to avoid biased outcomes. A hiring manager should handle other parts of the negotiations, but having the manager lead compensation negotiations while trying to close the candidate can lead to conflict that could impact their future work relationship.
We recommend an innovative but controversial solution for the compensation negotiation problem: the no-negotiation policy for compensation. One way of banning negotiations is to give each candidate the top package they would have received had they been strong negotiators. This process has the benefit of avoiding bias in the negotiation process and preventing ill-will. Research shows this can be a big problem for women, as women are judged more harshly than men when they negotiate compensation 3 and this may be one reason why women negotiate less than men. 4
If this solution is too uncomfortable, offering the same compensation in two forms is one way to preserve the opportunity for candidates to negotiate. Offering to swap cash for equivalent stock value or vice versa gives the same overall compensation but can address cash needs or lack of cash needs along with risk aversion or risk affinity. As an alternative, a company can opt to minimize the range of acceptable negotiated increases to limit variance in compensation.
There may be cases when you feel you need to make exceptions because of the hiring climate or special circumstances, like you have an urgent hiring need for a specific function. Rather than going against stated policy in these cases, consider building an exception fund and using it to offer a one-time bonus. This mechanism prevents the long-term inconsistencies of permanent pay and compensation exceptions.
Information on the metrics used to run a company is important for people to make the right decisions in negotiations. Employees can better understand the value of their equity and the value they are creating as a team if they have access to information about the company’s financials.
However, many employees are less likely to understand equity; this knowledge gap can disproportionately affect underrepresented groups. All employees, regardless of demographic background, should learn about the benefits and challenges of owning equity. The financial ramifications of purchasing stock early in a startup’s life can have negative tax and other ramifications. 5
We share this helpful reference as a starting point and encourage you to continue exploring.
- Why Diversity Programs Fail
- Accounting for the Gap: A Firm Study Manipulating Organizational Accountability and Transparency in Pay Decisions
(February 2016). “The Simple Truth About the Gender Pay Gap.” AAUW. Retrieved April 2016 from: http://www.aauw.org/files/2016/02/SimpleTruth_Spring2016.pdf ↩
(January 2014). “Pay Secrecy and Wage Discrimination.” Washington, DC, Institute for Women’s Policy Research. Retrieved from: http://www.iwpr.org/publications/pubs/pay-secrecy-and-wage-discrimination-1 ↩
Bowles, H., Babcock, L., and Lai, L. (7 November 2006) “Social Incentives for Gender Differences in the Propensity to Initiate Negotiations: Sometimes It Does Hurt to Ask.” Decision Processes 103(2007): pp. 84-103. Retrieved April 2016 from: https://www.cfa.harvard.edu/cfawis/bowles.pdf ↩
Konnikova, M. (June 20 2014). “Lean Out: The Dangers for Women Who Negotiate.” The New Yorker. Retrieved April 2016 from: http://www.newyorker.com/science/maria-konnikova/lean-out-the-dangers-for-women-who-negotiate ↩
Benner, K. (December 23 2015). “When a Unicorn Start-Up Stumbles, Its Employees Get Hurt.”* New York Times. *Retrieved April 2016 from: http://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.html ↩