# Compensation Frameworks Reference Salary bands, equity design, total comp modeling, comp philosophy, and raise/refresh processes. --- ## Comp Philosophy — The Foundation Before building bands, define your philosophy. Ambiguity in comp philosophy = pay equity lawsuits and trust erosion. **The five decisions:** ### 1. What market percentile do you target? - **P25 (below market):** Only viable with exceptional mission, equity, or growth opportunity. Flight risk is high after 18 months. - **P50 (market median):** Standard for most Series A–B companies. Competitive without premium. - **P75 (above market):** Premium talent strategy. Used by high-margin or talent-intensive businesses. Netflix model. - **P90+:** Top-of-market for specific functions (ML at AI companies, senior engineers at FAANG feeders). **Common hybrid:** P50 base + above-market equity = total comp at P65–75. ### 2. What's in your total comp package? Define each component explicitly: - **Base salary** — cash, market-benchmarked - **Variable / bonus** — % of base, tied to what criteria - **Equity** — options vs. RSUs, vesting schedule, refresh cadence - **Benefits** — health, retirement, PTO policy - **Learning & development budget** - **Remote/location allowances** ### 3. Are bands public internally? Recommended: Yes. Pay transparency reduces equity complaints, builds trust, and forces you to maintain clean bands. ### 4. How often do you refresh bands? Minimum: annually. High-growth markets: every 6 months (engineering specifically in hot markets). ### 5. How do you handle individual negotiation? Options: - **Fixed bands, no negotiation** (Buffer model) — simple, fair, loses some candidates - **Band range with manager discretion** — most common, requires calibration guardrails - **Individual negotiation within band** — flexible, creates pay equity drift over time --- ## Salary Bands: Construction ### Step 1: Define levels Standard IC levels (adapt to company): | Level | Title example | Scope | |-------|--------------|-------| | L1 | Junior / Associate | Execution with guidance | | L2 | Mid-level | Independent execution | | L3 | Senior | Leads workstreams, mentors L1-L2 | | L4 | Staff / Principal | Cross-team technical leadership | | L5 | Distinguished / Fellow | Company-wide technical direction | Management track: | Level | Title | Scope | |-------|-------|-------| | M1 | Manager | Team of 4–8 ICs | | M2 | Senior Manager | Manager of managers or larger team | | M3 | Director | Function or large org | | M4 | VP | Business unit, company-wide | | M5 | SVP / C-Suite | Executive | ### Step 2: Gather market data **Data sources (by quality):** 1. **Radford / Aon** — Gold standard. Expensive ($10K+/year). Worth it at Series B+. 2. **Levels.fyi** — Excellent for engineering. Free. Self-reported but large sample. 3. **Glassdoor Salary** — Broad coverage. Less precise for startups. 4. **Pave / Carta Total Comp** — VC-backed companies. Good peer benchmarking. 5. **LinkedIn Salary** — Free tier. Reasonable signal for G&A roles. 6. **Offer letter data** — What candidates are bringing from other companies. Real-time signal. **What to pull:** P25, P50, P75, P90 for each role × level × geography. ### Step 3: Set band structure **Band width (range within a level):** - IC bands: 80–120% of midpoint (i.e., ±20% from center) - Manager bands: 85–115% of midpoint - Wider bands allow room for differentiation within level; narrower bands reduce pay equity drift **Band overlap between levels:** - 10–20% overlap is normal (top of L2 overlaps with bottom of L3) - > 30% overlap: your levels are too close together - No overlap: new hires jump too much between levels (compression risk) **Example engineering band structure (US, Series B company, P50 target):** | Level | Band Min | Midpoint | Band Max | |-------|----------|----------|----------| | L1 Software Engineer | $90K | $105K | $125K | | L2 Software Engineer | $115K | $135K | $160K | | L3 Senior SWE | $150K | $175K | $205K | | L4 Staff SWE | $195K | $225K $260K | | M1 Eng Manager | $175K | $205K | $235K | | M2 Sr Eng Manager | $215K | $250K | $285K | | M3 Director, Eng | $255K | $300K | $345K | *Adjust by 15–25% for non-SF/NYC markets. Adjust -40% to -60% for European markets.* ### Step 4: Place employees in bands **Compa-ratio** = Employee salary / Band midpoint | Compa-ratio | Interpretation | |------------|---------------| | < 0.85 | Below range — immediate risk | | 0.85–0.95 | Developing in role | | 0.95–1.05 | Fully performing (target zone) | | 1.05–1.15 | Senior/expert in role | | > 1.15 | Above range — flag for review | **Audit report:** Run quarterly. Flag anyone below 0.85 (flight risk) or above 1.15 (overpaid for level, or needs promotion). --- ## Equity Frameworks for Startups ### Option Basics **ISO vs NSO:** - ISO (Incentive Stock Options): For employees. Favorable tax treatment if held 1+ year post-exercise. - NSO (Non-Qualified Stock Options): For advisors, contractors, sometimes employees. Taxed as ordinary income on exercise. **Strike price:** Set to 409A valuation at grant. Lower is better for employees. Early employees win on strike price. **Vesting schedule standards:** - 4-year vest, 1-year cliff: Standard - 4-year vest, 6-month cliff: Startup market adapting to faster pace - 1-year cliff means: nothing until 12 months; monthly or quarterly after **Post-termination exercise window (PTEW):** - Standard: 90 days. Often too short for employees who can't afford exercise. - Better: 1–5 years or until IPO. Use as a talent differentiator. - Companies extending PTEW: Stripe, Airbnb (pre-IPO), Square, most employee-friendly startups. ### Equity Grant Ranges by Stage and Level *Expressed as % of fully diluted shares at grant. Ranges vary significantly by market, stage, and funding.* **Seed stage:** | Role | Equity % | |------|----------| | Co-founder | 20–40% | | First engineering hire | 0.5–1.5% | | First non-technical exec hire | 0.25–0.75% | | IC (L2-L3) | 0.1–0.4% | | IC (L3-L4) | 0.2–0.6% | **Series A:** | Role | Equity % | |------|----------| | VP / Head of function | 0.3–0.75% | | Director | 0.1–0.3% | | Senior IC (L3) | 0.05–0.15% | | Mid IC (L2) | 0.02–0.08% | | Junior IC (L1) | 0.01–0.05% | **Series B:** | Role | Equity % | |------|----------| | VP / Head of function | 0.1–0.3% | | Director | 0.05–0.15% | | Senior IC (L3) | 0.02–0.07% | | Mid IC (L2) | 0.01–0.03% | *At Series B+, equity is increasingly expressed in dollar value (grant value = X shares × current 409A). Use Carta or Pulley to model dilution.* ### Equity Refresh Program **Why it matters:** Employees hired at Series A with 4-year vesting will be fully vested by Series B. No unvested equity = no retention hook. **When to refresh:** - After every significant funding round - Annually for high performers (top 20%) - After promotion (role-commensurate top-up) - Counter-offer situations (use carefully — signals you underpaid initially) **Refresh models:** 1. **Anniversary grant:** Annual cliff-free refresh for all employees above a performance threshold 2. **Evergreen model:** Continuous vesting maintained — refresh annually so employee always has 2–3 years remaining 3. **Event-based:** Refresh tied to milestones (promotion, funding, annual review cycle) **Dilution awareness:** Every refresh dilutes existing shareholders. Model pool usage quarterly. Replenish option pool before it drops below 10–12% of fully diluted shares. --- ## Total Comp Modeling ### Components of Total Comp ``` Total Compensation = Base Salary + Annual Bonus (target %) + Equity Value (annualized grant / vesting period) + Benefits (employer-paid premiums, retirement match) + Allowances (home office, internet, L&D, commuter) ``` ### Annualizing Equity Value For comparison to cash compensation: ``` Annual equity value = (Grant shares × Current 409A price) / Vesting years ``` Example: 10,000 options at $2 strike, current 409A = $8, 4-year vest - Grant value at current 409A = 10,000 × $8 = $80,000 - Annual value = $80,000 / 4 = $20,000/year - If base is $150K, total comp is ~$170K/year *Note: For recruiting purposes, you can use last preferred share price (VC price) to show upside — but be transparent about the difference between 409A and preferred.* ### Benefits Valuation Frequently undervalued in offers. Quantify explicitly: | Benefit | Typical employer cost | |---------|----------------------| | Health insurance (employee) | $4K–8K/year | | Health insurance (family) | $15K–25K/year | | 401K match (4% of salary) | $5K–10K/year | | L&D budget ($2K/year) | $2K/year | | Home office stipend ($500) | $500/year | A $140K offer with family health coverage + 4% 401K match is worth $165K+ total. --- ## Raise and Refresh Process ### Annual Compensation Review Cycle **Recommended cadence:** - October/November: Market data refresh, band updates - November/December: Manager merit recommendations - December/January: Calibration and approvals - January/February: Effective date for new salaries + equity grants **Budget allocation:** - **Merit budget** (performance-based raises): 3–5% of total payroll typically - **Market adjustment budget** (fixing below-band salaries): Separate from merit. Non-negotiable to avoid attrition. - **Promotion budget:** Separate. Promotions should not come from merit pool. ### Merit Increase Guidelines | Performance Rating | Merit Increase Range | |-------------------|---------------------| | 5 – Exceptional | 8–15% | | 4 – Exceeds | 5–8% | | 3 – Meets | 2–4% | | 2 – Needs improvement | 0–1% | | 1 – Underperforming | 0% (PIP active) | *Adjust based on compa-ratio. A high performer at P90 of their band gets a smaller increase than a high performer at P50.* ### Compa-Ratio Adjustment Matrix | Performance \ Compa-Ratio | < 0.90 | 0.90–1.00 | 1.00–1.10 | > 1.10 | |---------------------------|--------|-----------|-----------|--------| | Exceptional (5) | 12–15% | 8–12% | 5–8% | 3–5% | | Exceeds (4) | 8–12% | 5–8% | 3–5% | 1–3% | | Meets (3) | 5–8% | 3–5% | 2–3% | 0–2% | | Needs impr (2) | 0–2% | 0–1% | 0% | 0% | ### Promotion vs. Merit — Keep These Separate **Common mistake:** Using merit budget to fund promotions. This forces a choice between rewarding performance and recognizing level change. **Promotion increase guidelines:** - One level (e.g., L2 → L3): 10–20% increase, new equity grant - Two levels (rare): 20–35% increase, new equity grant at new level - Manager track (IC → M1): 15–25% increase, new equity grant **Promotion criteria process:** 1. Manager nominates with written business case 2. Calibration committee reviews cross-functionally 3. HR validates against band (no off-band exceptions without CHRO sign-off) 4. Employee informed before annual review — never surprised at review meeting ### Off-Cycle Adjustments When to do them: - Counter-offer situations (see below) - Competitive intelligence reveals underpay for a specific role - New market data shows a role significantly under-benchmarked - Internal equity audit reveals unexplained gaps **Counter-offer policy:** Three options: 1. **Match** — Risk: signals you underpay; sets precedent 2. **Partial match** — "We can do X, which is the top of your band" — cleaner 3. **Decline** — Accept the attrition, improve the band for the next hire **Rule:** If you're regularly in counter-offer conversations, your bands are stale. Fix the bands. --- ## Pay Equity Audit Run annually. Non-negotiable at Series B+. **What to audit:** - Pay gap by gender within each level and function - Pay gap by ethnicity within each level and function - Compa-ratio distribution across demographics - Time-to-promotion by demographic group **Methodology:** 1. Pull all employee data: level, function, salary, tenure, performance ratings, gender, ethnicity 2. Run regression controlling for level, tenure, and performance 3. Unexplained gap after controls = the problem to fix 4. Flag and remediate within the same review cycle **Legal exposure:** In many jurisdictions, documented pay gaps without remediation plans are litigation risk. The audit creates a record of intent; remediation closes the risk. **Remediation budget:** Set aside 0.5–1% of payroll annually for equity adjustments. If you're doing it right, this shrinks over time.