There is no culture trait more important than your compensation philosophy. Team development, org structures, and off-sites are secondary to how you pay people.

Why?

Because your system of pay communicates how you think about the long term success of your company. Something rushed, complicated, and managed by someone else leads to a culture that follows suit.

How your compensation philosophy works is separate from how much you can pay people. In a perfect, cash rich world, you’d pay everyone above market rate. That’s not a reality for 99% of startups.

Instead what employees value most is having a clear understanding about why your philosophy exists, how it works, and how they can level up. It doesn’t need to be complicated. It just needs to be clear and consistent with a commitment to make it better over time.

I prefer to think about compensation philosophy like a product. You create versions and each one gets better over time as you learn what’s missing in your previous version. It also requires you to stay committed to improving it over time as you find flaws. Teams can tell when a product is improving. The same should be said for your compensation philosophy.

Moment is six years old and we’ve gone through three versions. The first was equal compensation for everyone on the team. The second was built around skills. And the current version is built around ownership.

It has taken me a decade to create a compensation philosophy. It has taken me some time, but i’ve come to realize that I can’t outsource it. I can get help to run it, but ultimately it’s up to me to create it and improve it as the company scales.

Two Compensation Methods

There are two ways to compensate people.

1. The Negotiated Method – Used in NFL, it’s you against the employee to determine their salary. Each person is treated differently and although you create some general guidelines, you bend to the request of your better players.

2. The Formula Method – Championed by Buffer, this method relies on a set formula where employees can self calculate where they stand and how to make more. This system doesn’t bend to the individual, but instead creates a set of rules that everyone can use.

The Negotiated Method

The negotiated method is how most of the world operates. It’s considered standard and therefore your investors, board, and team are used to it.

This methodology is based on trying to align compensation to each person. It’s a lot of work. You end up spending a lot of time trying to align financial incentives to performance with bonuses, commissions, and justification for why one person is worth more than another.

Your most vocal employees, including bosses, will dictate your compensation philosophy. This doesn’t always mean that your most talented employees are the most vocal. It means you have to consider both the vocal and the non-vocal.

An unintended consequence to the negotiated method is that it generally benefits men. There are several studies, demonstrating that men prefer jobs where there is room to negotiate. While women rarely negotiate. Bosses are supposed to offset this personality difference, but compensation is a very hard skill to teach. Even if you train your managers, compensation is not applied evenly across the company.

Reasons to consider this method…

• You are hiring very quickly. You have raised a lot of money and need to move quickly in deploying the capital. You don’t have to create anything different from the standard.

• Equity value is climbing. You have a currency that continues to go up in value with frequent capital raises. An increasing company valuation gives people confidence to stick around as they calculate the value of their stock options.

• First time ceo. Of everything you need to learn, developing a new compensation philosophy is much lower on the list to learning how to be a great ceo.

• Function Dependent. Your business success is driven by a few function types and therefore you need to win in having the best of that function. Engineering and sales talent comes to mind and the rate for the best talent is very expensive.

Specifics you need in place with this method….

• Explanation. The Netflix 2009 culture doc make it clear why and how they compensate the team. It makes it clear why some employees make more than others. This is for a highly funded, venture scaling business.

• As and Bs. This a simple structure but you need a way to rank your talent so the managers know who to pay and who not to pay. You need some uniformity other than the most demanding bosses getting the most compensation for their teams.

• Market rates. You need to refresh your compensation rates annually with the latest market rates, ready to negotiate with new hires and existing hires who are thinking of leaving. Within this you need red lines the team can not cross in paying people.

• Compensation training. You have to train managers on how to manage compensation. In the early years you will do this but that will cap out therefore you need to teach them how you want them to manage compensation. Someone on your team with a lot of experience here, is important.

• Robust talent pipeline. You are going to go through more people, therefore you need a robust pipeline of talent. It’s not a bad thing but hard charging, pay me more employees are going to move on if your growth or comp slows.

The Formula Method

The formula method is different. The most public version is Buffer and their open salary.

This method takes a lot more consideration up front. You have to decide what the core value is you financially reward people for. Then build a financial model that considers your different functions, how fast people want to move up, and where you need to be against market rates.

The biggest benefit is that once in place, it takes very little management. The team can easily add new people and existing employees have a clear path to earning more money based on how they develop. You turn the whole discussion around from..what are you going to give me…to how can I level up?

You still have to teach managers how to properly review employees against the skills they are working on. But they don’t have to be come expert negotiators. The stress of trying to align financial incentive to each person goes away.

Being different isn’t for everyone. Savvy employees can make more in the negotiated method by continuing to move jobs and asking for raises. Therefore you’ll miss out on the traditional style of talent.

Reasons to consider this method…

• Easier hiring process. It removes the awkward negotiating at the end of the hiring process because the model is provided up front, a project tells you what level they are at, and then people take it or leave it. It puts all of the energy into testing their level and removes the fear on both sides of the table.

• Skills vs Compensation. It changes the discussion from how much do people make, to what level are they at? It separates the financial insecurity and puts the focus on people getting better at set skills. Those skills result in a better company and more compensation.

• Transparency. Compensation is the scariest topic. Unmasking what people make is one of the most vulnerable things a culture can learn. You don’t have to publish salaries but people can do their own math on what everyone makes based on the level they are at.

• Less Overhead. This method runs itself. People know what level they are at, what skills they have to improve at, and have a clearer path to increasing their own salary. It puts development into the hands of the employees and not into an hr department.

What you need in place…

• A Model. You need a base comp for each function and multipliers for skills, location, and leadership.

• Salary Calculator. The result of your model is a salary calculator that current and potential employees can use to calculate how much they can make as they move up.

• Evaluations With Levels. A consistent way you evaluate everyone in the company. If these evaluations are function specific it takes a lot more work. Whatever you choose has to align to your levels so it’s clear what skills they are improving and therefore what level they are moving up to.

• New Hiring Process. You need to change your hiring process to see people work. Because the model is based on what level people are at, you need as many avenues as possible to make an accurate assessment before they join.

The Staples

Regardless of which method you select every pay system ALSO has extras that you need in place.

• Equity. This can be a whole post in itself, but you need to consider equity with both methods and have a clear policy about why it is / isn’t given and how people can get more of it.

• Documentation. This isn’t a handbook. It’s something anyone can read before they join the company to understand your compensation philosophy. It should be clear about why and how it works.

• Evaluations. You need a consistent way that you review and evaluate people. This can evolve over time as you move from generalists to functional expert. Regardless you need a score card employees can use to know where they stand.

• Review process. Separate from how you evaluate people you need a process with timing for when. Employees count on this in setting their personal goals so you have to be clear about when and how this happens.

• Time off. How are you going to handle people working more than and less than a full week? Often people put something in place concerned about when people miss days. If you are going to do that, you also have to think about the days they put in more than a full day or a full week. This even includes time off the clock they are just thinking about work.

• Parenting. Daily work is different from taking time off to be a new parent. This only makes sense once you have kids but you’ll need a policy for new parents. You can separate time for the primary care taker versus secondary. You can also adjust this over time as you have more resources.

• Equipment. What job specific equipment are you going to apply. The simple answer is nothing, instead provide some money for them to buy their own equipment. A more complex answer is a list of stuff that you will need to manage and keep track of.

Moment Compensation

Rather than interject Moment through out the post, I summarized what we do in our 2.0 compensation.

• Philosophy – the formula method. We use this for both salary and equity.

• Documentation – we have a 14 page doc about our compensation philosophy. It covers why, what, and a lot of how.

• Evaluations – everyone has a scouting report. Similar to a sports player scouting report, ours has 10 skills and 15 micro levels. As people take on more ownership and improve at their skills they get compensated more. We review scouting reports every four moths.

• Time Off – we have unlimited vacation. We don’t keep track of the times people work or don’t work.

• Parents – time off to be a parent is separate because we need to back fill resources that are gone for longer periods of time. We provide 60 days for the primary care taker and 30 days for the supporting care taker. After that we have part time options as parents ramp back up.

• Equipment – to do the functions of your job, we don’t provide any equipment. We provide an annual $500 credit for people to improve their own equipment. If they need specific equipment to do their function at Moment then we purchase it, such as a unique piece of software, a machine, etc.

Thanks for reading. If you have any questions email or dm me [@marcbarros]https://twitter.com/marcbarros