Compensation | Part I: Approaching Pay (a bit) like Pricing
If there is an industry wide-open for disruption it is that of compensation. Reward and remuneration hasn’t evolved much beyond the world of excel, salary surveys, and legacy finance systems.
This is the first post in a three-part series on how to build a really bloody good compensation framework. 💸
Over the years I’ve been to plenty of meetups and events about this topic and I’m never left feeling particularly inspired or motivated. That sucks because comp is the heart of the commercial contracts you make with your team. How you reward them financially, and the decisions you make which form your comp strategy, strike to the very heart of the work we do in People Ops.
I tried to find an inspiring quote about compensation to put in this call-out, and all I could find were quotes about hiring and learning and development. Surely that proves some kind of point?
I frequently talk about how to expand your capacity as a People Ops function by thinking of People Ops like a Product. The field of compensation is no different, and is in-fact a fabulous place to start because this is something a People Leader can do with just an effective exec team and without requiring much foundational work.
So you wanna build a comp framework?
When is the best time? Now, probably.
When is the best time if you recruit remotely? 6 months ago, almost certainly.
Building a team remotely (be that cross-border or cross-country) makes compensation significantly more complex. It is your responsibility as a people leader to address that challenge before it becomes a problem. If there is one thing your team will scrutinise, it won’t be your L&D programme, or your choice of mental wellbeing app: it will be their compensation.
If you’re hiring remotely, comp is more likely to become an issue sooner due to the fact there is extra complexity, additional scope for unfairness and, to be frank, some chaos.
Note: the order of how you should approach a comp framework does differ somewhat. If you’re recruiting into one location (office or city), get started on a levelling framework and org structure before you start on comp. Why? It makes the comp work easier if you have your ducks in a row and thoroughly understand where your team is currently performing against each other. If you are recruiting remotely, you likely won’t have time and should do the work concurrently — you can iron-out org-design kinks later on and at least you’ll avoid making dire missteps in paying your team fairly.
Thinking like a Product Function: Pricing
The web is flooded with countless philosophies on how to price your product (just see here, here, and here). Pricing, like compensation, is a market force: there is no right or wrong answer. It is the role of someone doing a good job to work out the most efficient philosophy (or set of rules) to aid in reaching whatever goals you have as a company.
Compensation is pricing with higher stakes. You want to pay as close to what makes the folks you want to employ happy without bankrupting yourself. Ethically, you can’t really run pricing tests, and the data sets you have as a company are likely so small you won’t get anything meaningful anyway, but reading more into the world of pricing gives you fresh perspective on how to build a compensation framework in a way which offers your People Ops function bonus strategic leverage.
In the pricing world one thing I love is every company first establishes precisely what it is they’re selling and how that correlates to what people will pay.
If you’re selling a bagel, subscription pricing is likely a ridiculous idea. If you’re selling a luxury gym membership, you know the margins need to be higher than if you’re selling a kitchen sponge. However, when it comes to compensation, I have often found Founders, CEOs, and People Leaders making broad and useless statements like, “We want to pay competitively* across the board to attract the best* talent.”
Stop. Imagine: Asking your Head of Product/Marketing “How are we going to price our product?” and they said back “Competitively across the board to attract the best customers.” …🤔 It sounds just as absurd in the people context, let me assure you, and we need to do better.
*The words “competitively” and “best” are also rarely thoroughly defined.
Your “buyer personas”
The first step towards pricing something is understanding your product and who you want to be ‘buying it’.
I often analogise employee experience to a subscription product. In this instance you need to work out what kind of product are you selling and who you want to be subscribing. The considerations I believe aid this discovery are considering your required: employee skill and employee leverage.
Employee skill is essentially what it says on the tin: how skilled do you need your employees to be: do you need PhDs or is this manual work where your team can be trained on the job?
Employee leverage is the value each role individually adds to your organisation. If you’re building a small research team trying to design an AI generated protein, you’re probably going to be indexing high on employee leverage: the input and voice of every hire is crucial and they have a massive ROI, they are hard to find, and you want to employ them for a long time. If you’re building a manufacturing line you’re probably going to be recruiting at a higher volume and, in many respects, can take bigger risks.
It’s important to work out where your company is on this quadrant. Then, as an additional exercise, ask your exec team if every function in your company is in the same position. Finally, do the same for your competitors for talent.
A side note: It’s tempting to put your team way up in the top corner, but try to be objective about this. If your team doesn’t require a PhD, and you aren’t hiring primarily principles, it’s unlikely that is where you’re competing, and pretending that is where you are competing will result in an unrealistic comp strategy.
Some companies may have an engineering team which is in the higher quadrant, but are happy to have another function further towards the low corner — understanding this is helpful towards deciding if the way you structure your compensation should be the same across the board.
Say you’ve found your average position on this quadrant, and you have identified that one team in your company is in a very different position than the rest. This is an insight into how and where you will need to be most competitive and indicates a need to make parts of your compensation methodology contingent on the teams which index highest.
Maximise your lifetime value
I recently had a conversation with a close friend who came to me really pissed off that his company had paid a (highly skilled) graduate a £20,000 sign-on bonus when they, an experienced senior, had no such courtesy. On the face of it, I understand the frustration.
However, this is, in my experience, a keen strategic decision. It begs the question — why would a company offer graduates high sign-on bonuses but not senior staff?
The answer lies in the defining of organisational design principles.
Org design principles are somewhat close to values. They are, in short, a way of identifying where the greatest lifetime value presents itself in your team. This isn’t which team your most skilled colleagues are necessarily. It is identifying which types of team members contribute the most to your company mission, and which traits or profiles must be consistently brought onboard to make you successful.
This piece of work is something you need to do with your executive team, and requires a strong pre-existing insight into your strategic aims as a business.
Ask: Are you an organisation which, in order to deliver your strategy, has chosen to invest heavily in principles and leaders with deep expertise (a law firm or consulting, for example, may fall in this area)? Alternatively, are you a business which relies primarily on innovation with a flat hierarchy, where you invest heavily in bringing highly-motivated juniors onboard with a short, high return on investment?
I advise you get together with your executive team and ask some questions (or, alternatively, you can work through this Miro board workshop):
- Which team members, or roles, require the highest investment from us to reach our goals?
- Which team members, or roles, do most of our processes pivot?
- Which functions could (not saying you need to) be outsourced, if any?
- Which role-types (or who) are our biggest strategic advantages?
- Which traits and skills should we hire for in our most crucial functions?
- How structured and layered is our ideal hierarchy to reach our current goals?
- If we had to reduce our team to only the “MVP” which roles would remain?
From here, you should be able to identify the key design principles by which you should structure your organisation. These form the lens by which you make all recruitment-planning and hiring decisions. They have the added bonus of helping guide you towards where you need to be competitive and creative with compensation.
An example: You’re a SaaS platform building a disruptive social marketing tool, your most crucial teams are product and growth-hacking. You could, realistically, outsource almost all other functions if you were in dire-straights, but you want to build a full-stack business. You require innovation and your field is new with few experts, so you want to hire juniors and graduates wherever possible, but you do need a few highly-skilled advisors and leaders to guide the pack. Your organisational design principles may be:
- High growth: We require many people to reach our goals. We hire high volume and have a relatively large team.
- Innovation first: We have to innovate to succeed, and reward creativity, entrepreneurship and quick-thinking above expertise.
- Servant Leadership: We have few senior leaders, and prefer them to be “career managers” to cover as much ground as possible.
- Flexible: We have to hire skills which are flexible because we create and disband squads and teams often.
- Fuelled by potential: We hire graduates and invest in their development. Expertise can be easily obtained in our disruptive field.
You may be reading this and not entirely sure what this has to do with compensation. I understand, and the slightly abstract nature of this work is why it is often overlooked.
If the previous step identified where you need to be most competitive, this identifies who in that group gives you the highest value. It’s the difference between “we are selling to 23–26 year old women” and “we are selling to 23–26 year old working mothers who engage with social media.”
This is where you identify: the need to be most competitive with your juniors or; that you may need a very high volume of a certain roles or; a crucial prioritisation towards those who value money above mission.
Develop your comp calculation (coming next…)
So — finally — you know broadly where you stand in terms of the type of team you need to build, and where you need to compete for that talent. This means you have a solid understanding of which kinds of rules you can and should prioritise when it comes to building your calculator.
If you’re dizzy from all this theory — keep tuned over the next few weeks as I plan to post two follow ups to this:
- Part II: How to build and tune the compensation principles which form your calculator.
- Part III: Whereby’s compensation framework, giving you a detailed breakdown of how we put pen to paper.
Here are some things I read about pricing to help me write this piece:
Pricing Guide: How to Price Your Products
Pricing One of the secrets to business success is pricing your products properly. Price your products correctly and…
8 Steps Involved in Price Determination Process
ADVERTISEMENTS: Some of the major steps involved in price determination process are as follows: (i) Market Segmentation…
Building a better pricing infrastructure
Over the past two decades, most companies have recognized the bottom-line impact to be gained through effective…
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