Variable Salaries: Aligning, Boosting and Rewarding actual outcome

The main trade-off regarding wages is the split between fixed and variable salaries. The rule of thumb is to give 20% of the fixed salary in variable. In the US it is on average 50–60% and can go up to 100% in certain companies.

A good variable policy is a management lever to (1) link individual contributions to the overall strategy of the company, (2) catalyse everyone’s outcome (by increasing motivation), (3) fill the gap between market practices and the actual outcome.

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Startups Employees Perks & Incentives, part1: Wages

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Main Components of a Compensation Policy

The core principles of any good compensation policy:

  • Being as objective as possible: this ensures fairness and acknowledges a basic truth: people talk. The goal is to ensure fairness, real and perceived (more or less the same package for the same position, all things being equal),
  • Cash is for a short/mid-term reward when equity is a long term alignment,
  • Compensation needs to be adapted to market practices (especially, to local practices).

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Netflix has made their compensation philosophy famous thanks to their amazing culture deck (slides 95–111): pay top of market, because one outstanding employee gets more done and costs less than two adequate employees. This requires a frequent update since market compensation change often.

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Establishing the salaries of founders is never easy. Their profiles are very eclectic and for founders, the real incentive should be equity, not salary.

The general principle is the following: being able to earn more money in the long run if the company is successful thanks to equity, but having a discount in the present time (especially before market-fit), compared to what they could be earning in an established company.

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In the economic theory, wages are linked to the value created by the employee. The problem is that value creation is very hard to measure.

Sometimes someone’s productivity is simple to assess (eg: if you manufacture products all by yourself). But once you start to put in place some kind of division of labour, it starts to get very complex: different people contribute in different ways to the company’s value creation.

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  • First, employees are very impacted by differences of salary within their peer groups.
  • Second, this effect does not happen when employees learn that their managers and boss earn even significantly more money than they do.

The key is to think in term of fairness (same salary for the same responsibility, and never forgetting that employees care mostly about their standing in a specific reference group — their peers), which does not hinder you from using money as an incentive to get a promotion.

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Buffer, being a distributed team across the world, had to make sure they were competitive with the local market practices and keeping a fair formula for all their employees.

To build their grids, they designed a transparent salary formula, which has the benefit of making the salary readable and objective (let alone the experience which is discretionary): Role * Experience * Loyalty * Choice

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You cannot rely exclusively on benchmarks and market practices, so you will have to build grids of compensation across your company. For each type of position (“tracks”), you should have a dedicated grid. You’ll end up with grids for sales, developers, product managers, etc. 

The bigger your company, the more tracks you will have (eg: data scientist, buyers, account managers, etc.). These grids should reflect market compensation, becoming efficient proxies between two compensation benchmarks.

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Many companies have strict policies against discussing salaries with coworkers. The older generation is brainwashed to see conversations about salary as a ‘cloak and dagger activity’. 

Millennials have broken this flawed and unwritten rule, making discussion of salaries a common conversation, resulting in increased salary transparency and better negotiation power.

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How to Talk About Salary With Your Coworkers

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Free food, Beer taps and ping pong games in the break room do not help employees feel connected with the company's vision, mission or direction.

Employees prefer equity/stock compensation, the non-cash payout they get by being allocated restricted stock options. 

Employees then become partial owners of the company, vested into how it performs, increasing their motivation to be more productive and effective.

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Salary transparency

In traditional corporate environments, the salary is often hidden because it’s a game of cat and mouse trying to figure out what salary the candidate is currently on, what they’re expecting, and what the company is willing to pay.

But this lack of disclosure hurts workers. Knowing the expected salary upfront lets a candidate understand whether a job will be financially viable for them. It also streamlines conversations later in the hiring process.

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Why companies don't post salaries in job adverts

bbc.com