Table of Contents
- Fair across positions and locations
- Equitable among employees
- Consistent with your policies and beliefs
- Competitive with your market
- Explainable to your people
People are the most critical ingredient for an organization’s success. This is especially true in competitive industries like tech. Ultimately, any successful organization relies on its employees to execute on a strategy that helps the organization accomplish its mission.
To succeed, leadership teams across the globe must develop workforce strategies that attract, motivate, and retain the right people. Developing and enforcing a strong compensation practice is one of the most important steps in a successful workforce strategy. And in today’s competitive world, this is more important than ever.
For most of us, the future of work arrived abruptly, bringing with it increased complexities that we must address directly. Most organizations now compete globally with big tech for talent, and we must deal with the rise of distributed work and employees’ growing demand for transparency and fair and equitable treatment.
In this article, we’ll share five pillars that you can use as guiding principles to build a strong compensation practice that helps you attract, motivate, and retain the right people for your organization.
Speaking from personal experience
We have been planning on starting a compensation company since we met in 2016.
You see, Lisa and I have been underrepresented minorities in our fields our entire careers: Lisa as a woman in tech and I as a hispanic man, first in finance, then in tech. We met at Expanse, a startup experiencing a period of hypergrowth. I was hired into the Finance team and led our compensation efforts: from building and maintaining our compensation bands as we expanded to new locations and through multiple fundraises, to explaining equity compensation to prospective and existing employees, and even managing our various commissions plans. Lisa was one of Expanse’s earliest employees and interacted with compensation, first as an employee, then as a hiring manager; she later joined the executive team at Abnormal Security facing the same challenges once again, this time from a more strategic vantage point. We learned what worked - and more importantly - what didn’t.
We grew frustrated with a status quo that, despite good intentions and countless hours, resulted in painful processes and bad outcomes that disproportionately impact women and minorities. It was this frustration - at the personal and operational level - that led us to start Assemble.
And now, without further ado, let’s dig in!
Assemble’s 5 Pillars for a Strong Compensation Practice
The best way to set your organization up for success is to be intentional about what your intentions and goals are, and then stick to them. The same goes for your compensation practice.
At Assemble, we have two deep beliefs around how to build a strong compensation practice. The first is that compensation is an organizational responsibility. This means that the full organization must align around the same intentions and system. Commitment is key to success.
The second is that better compensation decisions are defined by the five pillars below. We like to think of these pillars as quality tests only a strong compensation practice would pass.
1) Fair across positions and locations
“Is [this program or decision] fair across positions and locations?”
Fair compensation does not mean equal compensation for all employees. (Only a few companies subscribe to such a philosophy). Rather, fair compensation means a compensation package for each position or job at your organization that: 1) is commensurate with the job requirements, responsibilities, and experience required; and 2) provides the employee with sufficient income to meet their basic needs and have some discretionary income for the location they are based in.
While no formula perfectly captures fairness and works for all organizations, you can serve your organization well by being intentional about how you value each position, and by deciding whether and how location impacts (or doesn’t impact) compensation at your organization.
Your organization should develop a clear compensation philosophy and a job architecture (aka job levels) that defines the positions or jobs your organization employs and will hire in the future. Once established, your organization should codify the relevant skills and attributes it values and will reward. These may include years of experience, technical or academic training, domain knowledge, managerial responsibilities, and other desired skills and attributes. Fair compensation should also translate to similar positions being compensated similarly. For example:
- An AI technology startup places a high value on machine learning engineers. As a result, they assign a premium for that skillset, and pay more for that role than for other software engineering roles. By outlining the relevant skill it values, the AI technology startup can build a compensation practice that fairly compensates machine learning positions.
Dealing with positions across locations has become more challenging recently for many organizations. Previously, most organizations operated in one or a few locations. Now, many are adapting to the rise of distributed work - particularly in tech - and operating in more locations than ever before. Building on a strong location-based compensation strategy merits its own blog post. For the purpose of this post, we will simply highlight that your organization should be clear about whether and how location plays a role in compensation decisions. If your organization adopts a location-based compensation strategy, be sure to use reputable data to inform your decisions. For example:
- A business analytics company that operates in various locations may adopt a location-based compensation strategy. After looking at the available compensation market and cost of living data, it may decide to pay a premium for positions in NY and SF relative to Boston and Chicago.
What can I do to implement a fair compensation practice?
The best way to make fair compensation decisions is to build compensation bands (aka pay ranges) that are tied to your compensation philosophy and job architecture, incorporate the skills and attributes your organization values, and whether and how location impacts compensation. Well-structured compensation bands help remove bias from your organization’s compensation practice by replacing the question, “What should we pay Jane Doe?” with the following questions:
- What position will Jane Doe occupy and where?
- What is our willingness to pay for that specific position, in that location?
- Based on her skills and attributes, and performance if she’s an existing employee, where should we place Jane Doe on the band?
Further, you can now use these compensation bands to compare how you are compensating similar positions or the same position across locations to assess fairness. In our examples above, the AI technology startup can use their compensation bands to compare how they compensate machine learning engineers vs. software engineers, and the business analytics company can compare their bands across NY, SF, Boston, and Chicago.
2) Equitable among employees
“Is [this program or decision] equitable among employees?”
We strongly believe in equal pay for equal work. Not only is it the morally right thing to do, but in the U.S. and many other countries, it is illegal not to.
According to the U.S. Equal Employment Opportunity Commission (EEOC), the Equal Pay Act “requires that men and women in the same workplace be given equal pay for equal work. The jobs need not be identical, but they must be substantially equal.” Importantly, the EEOC defines pay broadly, including: “salary, overtime pay, bonuses, stock options, profit sharing and bonus plans, life insurance, vacation and holiday pay, cleaning or gasoline allowances, hotel accommodations, reimbursement for travel expenses, and benefits.” And according to Title VII, it is an unlawful employment practice for an employer to “discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin.”
In addition to Federal regulatory requirements around equitable compensation, there are also growing demands from employees and some state governments (like California and Colorado) that place greater pressure on organizations to enforce equitable compensation practices.
In short, this means that employees holding the same position in the same location should be compensated equitably.
What can I do to implement an equitable compensation practice?
The best way to make equitable compensation decisions is to have well structured compensation bands that you continuously evaluate your employee population against. Here are three steps you can take to ensure your organization has an equitable compensation practice:
- First, make sure your organization has a defined job architecture and compensation bands for each position and location for which your organization has or plans to have employees.
- Second, ensure every employee in your organization is mapped to a specific position in your job architecture (this exercise is commonly referred to as “leveling” your workforce) and is assigned a location of work. This will ensure all your employees are appropriately mapped against their respective compensation bands.
How are you compensating your employees across various factors, including gender, ethnicity, and other protected classes? Do you notice any disturbing trends? With the information above, you can answer these questions and avoid future mistakes. You can evaluate whether your compensation practice is equitable by comparing your intentions (your compensation bands and philosophy) with reality (what your employees are actually getting paid relative to others in the same position and location). More importantly, you can use this information as reference to ensure you are not making compensation decisions that introduce inequities into your compensation practice.
We often hear organizations struggle when assessing equitability given there are various factors involved in driving compensation decisions, such as the career ladder (aka job family), position, and location. To control for some of these factors, consider using compa-ratios to normalize across these factors. Compa-ratios (short form for comparative ratios) are used to compare an employee’s or group of employees’ compensation in relation to a specific reference point. Compa-ratios are powerful because of their flexibility - they can be used in various ways. For example:
- To compare an employee’s compensation against their position’s compensation band (usually by using the compensation band’s midpoint).
- To compare how groups of employees (e.g., male vs. female) are compensated against their respective compensation bands in order to surface whether there are unintended trends of inequitable compensation.
Your organization may also want to have a formal pay equity analysis conducted by a third-party. While this is a great practice - and something we encourage organizations to consider - realize that these analyses are generally retroactive. There is a lot of proactive work you can do to ensure that your compensation decisions are equitable.
By taking the steps outlined above, your organization can proactively avoid instances of inequitably pay when making hiring decisions and compensation adjustments. Remember: the best way to correct a mistake is to avoid it!
3) Consistent with your policies and beliefs
“Is [this program or decision] consistent with our policies and beliefs?”
Every organization is unique. Your organization’s set of policies and beliefs will likely vary from those of other organizations. This is perfectly natural! What is important is that each organization is consistent in how those policies and beliefs are enforced, particularly when it comes to compensation.
Why is consistency so important? Operationally, consistency leads to greater predictability, which means you can build better and more efficient business processes that create expected and desired results for your organization. As it pertains to relationships, consistency builds trust. To build trust in your organization’s compensation practice, you will want to demonstrate to your employees that your compensation decisions are consistent with your policies and beliefs, and made in a consistent fashion.
As with fair compensation, when we say consistent we do not mean everyone gets paid the same. What we mean is that the stakeholders in your organization that are responsible for making compensation decisions abide by the policies in your organization.
This is where having a clear compensation philosophy is immensely beneficial. As discussed in one of our earlier articles, we encourage you to develop a compensation philosophy that you can socialize with your entire organization. This living document will capture your policies and beliefs and guide you in making consistent compensation decisions.
What can I do to implement a consistent compensation practice?
The best way to ensure your compensation practice is consistent with your policies and beliefs is to have a clear compensation philosophy that is available and easily accessible to all stakeholders who make compensation decisions.
When clearly written and socialized effectively, your compensation philosophy acts as the guiding document that drives all of your organization’s compensation decisions. The clearer you are, the easier it will be to use and evaluate whether your compensation decisions are consistent. Then, you can leverage your compensation philosophy to build programs that support it. For example:
- A healthcare technology startup has a compensation philosophy that clearly defines they will target to be at-market (i.e., 50th Percentile). The startup also has a strict no negotiation policy on new offers; they acknowledge this means the startup will at times lose on candidates due to compensation. By having these policies clearly defined, the startup builds a job architecture and compensation reference points tied to each position, which are consistently used on all offers.
With a clear compensation philosophy, you can build programs that support your compensation practice and empower stakeholders across your organization to make compensation decisions that are consistent with your policies and beliefs.
4) Competitive with your market
“Is [this program or decision] competitive with the market?”
Is your organization able to compete for talent against other employers recruiting from that same talent pool? To properly answer this question, you must first define what that labor market is. In other words, what other organizations are you competing against for this talent?
Once you understand the labor market you are competing in, you must analyze how competitive your organization’s compensation packages are against those from other organizations.
Remember, every organization is unique. One organization’s definition of competitiveness may not be the same as another’s. This definition largely depends on an organization’s size, industry, competitive peerset, locations of employment, available resources, and other non-monetary factors. Being competitive does not always mean matching your competitors’ offers dollar-for-dollar. In fact, people generally join organizations for more than just compensation. For example:
- Non-profits do not generally offer compensation packages that match the financial terms of tech companies. Still, they are able to attract, motivate, and retain talented people, likely due to other factors like a strong mission or cause.
That’s why we strongly believe that compensation decisions should be informed by the market, but not dictated by it. Yes, it’s important to understand what the labor market looks like to ensure you are making compensation decisions that are reasonable against the market, but understand that your organization’s circumstances will play an important role in deciding how competitive against the market you may choose - or can afford - to be.
Figuring how to select and use market data merits its own post. Market data is critical for building your compensation practice, but no market dataset is perfect. Most datasets are limited, incomplete, or inaccurate, and many are expensive. Furthermore, market datasets fail to provide important context behind the results. In the absence of perfect data, we generally see most organizations turn to more data by leveraging multiple market datasets. So remember, use market data wisely: let it inform, but not dictate your decisions.
To use market datasets effectively for comparisons, you’ll need to map each position in your job architecture against a specific job code in each dataset (a practice is commonly referred to as “job matching”). Be aware that a lot of context is needed to do this effectively, so it’s wise to allow time to work on this and to incorporate your department leaders in the process.
What can I do to implement a competitive compensation practice?
To determine whether your compensation practice is competitive with the market, follow these steps:
- With your leadership team, determine your desired level of competitiveness against the market. You can start at a high level and decide where you want to be against the market: below market, at-market, or above market. Making this decision requires an understanding of your organization’s resources, competitive market, and objectives. Keep in mind that every organization must make its own decision.
- Work with your recruiting team to get a sense for candidates’ expectations. What do they look like? If you have your compensation bands, how do they compare? Be careful here: you’ll want to make sure you compare apples-to-apples when talking about compensation. Make sure you’re talking about compensation in the same way (e.g., salary only, salary plus bonuses, total compensation, etc.)
- Evaluate recently rejected offers and recent departures, if any. Have many of them been due to compensation? If so, are there specific parts of the compensation package that were the problem? (e.g., salary was too low, equity was too low).
- Use market data available to you to inform your compensation practice and analyze how you compare against the market. If you have compensation bands, how do those compare against the market? Are you complying with your compensation philosophy’s intent? How about your employees, are any of them unusually under or over your intended compensation benchmark? If so, why?
As you can tell by now, there are many interesting and valuable questions you can ask and answer once you incorporate market data into your compensation practice. While time consuming, it is advisable to do so.
If your organization has a compensation philosophy and compensation bands, getting market data - whether self-collected via recruiting, collected freely via online sources, or procured through third-party providers - will make it easier for you to compare your compensation bands against the market and ensure your compensation decisions are competitive.
To ensure your compensation bands remain competitive over time, it is best to routinely reevaluate them against the market and account for inflation and other market movements. A well-structured job architecture and set of compensation bands will allow you to do this comparison more effectively and easily.
5) Explainable to your people
“Is [this program or decision] easily explainable to our people?”
Last, but certainly not least, your compensation practice must be explainable and easily understood by your people. This is where simplicity, clarity, and transparency are critical. A seemingly perfect compensation practice will fail to be adopted or trusted by your organization if it is not understood.
If your employees don’t believe your compensation practice is fair, equitable, consistent, or competitive, or if they have unaddressed concerns about how you make compensation decisions, you will soon run into issues. As the saying goes, perception is reality.
Adopting the first four pillars above will put you in a position to be more transparent with your employees because compensation decisions will be systematic and justified. This makes them easily explainable. Transparency and explainability are the keys to employees and managers feeling bought-in and trusting your compensation practice.
How transparent should your organization be? At Assemble, we believe in greater transparency, but never at the expense of confidentiality. However, we realize the appropriate level of transparency varies by organization, and should be determined in partnership with your organization’s leadership team.
In short, your compensation practice is explainable when compensation decisions can be easily explained and understood by your people. Simplicity, clarity, and transparency will help you in this regard.
What can I do to implement an explainable compensation practice?
First, determine how transparent your organization desires to be. What information is your organization comfortable sharing? While there are valid reasons to keep certain information confidential, transparency is important when seeking buy-in from stakeholders and building trust with your employees.
Second, consider whether and how this level of transparency might vary based on functions, teams, and roles across your organization. Generally, some functions will have greater access to sensitive information (e.g., HR, Finance, Legal) and may understand this information well. Other functions or roles may receive access, but may require more training and enablement to fully understand (e.g., hiring managers).
Once you’ve determined your organization’s policies around transparency, you can develop the enablement materials you need to ensure the key parties involved understand the information and buy into your compensation practice. Examples of these materials include:
- Explanation documents designed to help employees understand the reasoning behind a compensation program;
- Manager training around merit and compensation adjustment cycles;
- Results from a pay equity analysis reports; and
- Board/Executive-level reporting materials detailing compensation programs and their intended outcomes
A key thing to remember is that simplicity and clarity make things easier to understand, especially for those that are less familiar with compensation, such as new managers. To improve the likelihood that your compensation practice is understood and supported across the organization, consider making your programs simple to understand. Then, develop the associated collateral to educate stakeholders and empower them to make better compensation decisions for your organization’s employees.
In conclusion, you’ll know you’ve built a strong compensation practice when people in your organization -- leadership, managers, recruiters, and even employees -- feel confident that your compensation decisions abide by these five pillars.
Your objective should be for everyone in your organization to trust your compensation practice. The five pillars in this post will help you confidently answer the questions below within the context of your organization’s specific policies and programs. Is your compensation practice:
- Fair across positions and locations?
- Equitable among employees?
- Consistent with your policies and beliefs?
- Competitive with the market?
- Explainable to the appropriate people?
For those of us responsible for developing a strong compensation practice, remember that it is incumbent on us to align the organization around a system that people trust, and to empower those responsible for making compensation decisions to make better compensation decisions.
We hope you found this article helpful! Reach out to us to learn how Assemble can help you build a strong compensation practice that empowers your organizations to make better decisions.