Let’s face it - it’s hard to be detached when it comes to compensation.
There are few topics in any company’s operating system that provoke as much emotion. Is my pay enough? What are my colleagues being paid? Is my pay fair? That last one – is my pay fair – comes up a lot.
Yet there’s surprisingly little out there about what pay being fair really means. Usually you find some variant of the obvious statement ‘don’t pay people who literally do the exact same job at the exact same level at the exact same company, to the exact same quality, different amounts’.
But that’s not particularly useful when you’re trying to work out what fair means across a company where you have many varied roles that contribute different kinds of impact, in diverse ways, and at multiple levels of competency.
And if you don’t spell out exactly you’re making compensation fair, everyone’s just going to assume that it isn’t.
Spoiler alert: with the best will in the world, your employees will talk about compensation. So when an engineer and a marketer get together and compare notes, it’s best that they’re armed with knowledge of why their pay doesn’t look the same, rather than letting myths or rumours on how pay is put together take over.
Second spoiler alert: those myths or rumours are not going to land in your favour.
At early stage companies, it’s typical to make pay and titling decisions on a one by one basis. Each decision feels good and sensible in the moment, but the combination of lots of these decisions can end up looking like something closer to chaos – a ‘debt’ that you need to wipe later. To get out of this maelstrom, we need a way to make internally consistent decisions. We need an overarching philosophy to call upon.
At Pento we’ve set out to build a compensation philosophy and methodology to tackle both these problems head on – actually making pay fair, and making sure everyone understands how and why pay is fair.
We’re big on transparency, so whether you’re an interested peer, or thinking of joining us on the Pento rocketship (we’re hiring!), we’re going to lay out for you how we do pay at Pento.
We should caveat, there's no totally perfect way to structure compensation – any and every approach has pros and cons.
We’re early in our compensation journey; like many startups, things like cash, equity, and titles started out fairly unstructured. Now we’re more settled in who we are as a company, we’re ready to take that step in figuring out how who we are translates into how we pay.
At Pento, we sat down and outlined what the key pillars would be that would lead to a compensation philosophy that’s consistent with our Pento Principles and the outcomes and mission we’re trying to achieve:
By figuring out what our compensation principles would be, it also made it clear to us what it wouldn’t be and what we’d have to say no to. It turns out, this includes a fair amount of ‘conventional’ guidance on ‘how to pay’, but we’ll cover that later in the series.
So here’s how those five principles flow down into how we do pay at Pento.
With a view to being competitive, fair and sensible, we settled on market benchmarking by discipline. We know not everyone loves that different roles at nominally the same seniority get different pay, and it’s not unreasonable to ask, why should people who work just as hard as each other in different disciplines get paid differently?
The hard truth we came to grapple with was, that if we paid all people at (for example) a Senior level the average Senior pay in the business, those roles where Senior pay is normally much lower than that average would be plenty happy, but those roles where Senior pay is normally much higher than that average would go elsewhere.
So there were two ways to get around this: pay everyone at the rate of the highest paid ‘Senior’ discipline - which would not be sensible, and we’d burn cash at an alarming rate (metrics go out of whack, harder to fundraise, longer to go profitable, etc etc) - or find a way to get comfortable paying Senior roles in different disciplines, different, fair amounts: enter market benchmarking.
So every year, we benchmark all our roles to understand what the 50th, 75th and 90th percentiles look like in the market. From there, we put together salary bands for those positions. We start by benchmarking the middle of our bands to particular percentiles.
By looking at the other percentiles, and the gaps between the middle of one band and the next, the upper and lower bounds of a band then come together. We then match everyone to the compensation of the band for their actual level and role.
That’s all pretty straightforward, but in fast growing VC-backed companies like us, equity is also a pretty important part of compensation. So how do we apply benchmarking to equity?
We’ll admit – we find equity harder to model.
Especially at Executive Levels (7 & 8), benchmarking starts to deviate a lot by discipline, stage of business, revenue and last valuation. When we work with Executive levels, we use a full-benchmarking model, where we’ll get peer data on what a normal allocation looks like for a given role at a given company stage, as the formula we’ll show you below breaks, and does not remain Competitive after this.
But below Executive level, we take a similar approach at Pento as we do to cash.
In the interest of keeping things sensible and scalable, we don’t do a whole second benchmarking exercise; our formula uses the salary from the salary benchmarking, and a multiplier for each company level.
The new key variable for equity is the last funding valuation. The valuation element means that specific allocation amounts will change depending on when someone joins (or when they are promoted), and the formula looks a bit like this:
Salary (benchmarked) x Level multiple / Highest last round valuation
This spits out a consistent, fair equity allocation, that, by virtue of (hopefully) the valuation increasing over time, rewards earlier employees (who take on a lot more risk) with more equity, all within a formula that scales with Pento.
Whilst we don’t have to worry about factoring in historical pay into future or current pay increases because benchmarking always delivers a point-in-time number that is right, right now, historical allocations become important when considering future equity allocations. It’s easiest to show this through an example:
Imagine a new joiner where the inputs to the formula are like so:
40 units salary x 25% level multiple / 1 unit valuation = 10 equity options
Their initial 10 options allocation is nice and simple. Fast forward a year and they’ve had a pay increase to 44 units as part of a promotion, and the valuation is now 2 units
44 units salary x 40% level multiple / 2 unit valuation = 8.8 equity options
This would imply that despite their promotion they should have less equity – 8.8 options – than they have already! The way we get around this is, at the review point, looking at the difference in equity they’d get if both allocations (initial and subsequent) happened at the same time, with the same valuation.
Pre-promotion: 44 units salary x 25% level multiple / 2 unit valuation = 5 equity options
Post-promotion: 44 units salary x 40% level multiple / 2 unit valuation = 8.8 equity options
Difference: 8.8 – 5 = 3.8 equity options
In this example, we’d therefore give the employee a bump of 3.8 options.
This means it’s important for us to keep good records to be able to understand how to do equity top ups, and to explain what will seem like strange differences in equity allocations to employees who joined at different times with different valuations or (even) different formulas.
Thanks for making it to the end of our first blog in the Building Compensation series, the first of four parts walking through how we do pay at Pento, covering:
In the meantime, if this is right up your street and you’d like to build your compensation strategy alongside us, you can download our step by step guide to how to define your compensation philosophy, as well as our guide to building an equity allocation framework – and look out for more guides coming out with parts 3, 4 and 5!