Best Practices for Compensation Management

Introduction

In this article, we run through several best practices for startups who want to set up a best-in-class compensation management system. 

What is Compensation Management?

Compensation management is the process by which companies decide how to pay their people and follow through on their compensation plans. For startups of all sizes, people are one of, if not the most important driver of success. 

A compensation management system that allows teams to make excellent pay decisions quickly is vital to building, retaining, and motivating a strong team. 

Compensation Management Best Practices for Startups

To run an efficient and effective compensation management system as a growing startup, we recommend that you implement some or ideally all of the best practices below. 

1. Leverage Data-Driven Technology

The first compensation management best practice that companies should invest in is to leverage data-driven technology. 

Many startups use a mix of spreadsheets, ad hoc processes, and patched together reporting to perform compensation management tasks ranging from compensation cycles to pay approval workflows. In addition to taking significant time, these approaches commonly lead to worse decisions being made. 

In one case, an Aeqium customer had been using a system in which managers determined promotion or merit compensation increases without knowledge of their employees’ equity vesting schedules or amounts. This gap in data meant that employees could easily end up underpaid relative to the market in the event that their managers didn’t realize the nuances of their equity schedules. 

Aeqium was able to provide decision-makers in the compensation management process with data to ensure that they were paying employees adequately at-a-glance, preventing pay issues before they could cause employee retention problems. 

Technology that helps you make data-driven decisions also saves time by minimizing arbitrary decision-making. Data wins arguments, and putting all of the data that goes into compensation decisions in front of leaders allows them to accomplish their goals while spending less time. 

2. Use Compensation Bands

Compensation bands that cover cash and equity are the bedrock for compensation management. Compensation bands help you to establish a fair, data-driven set of guidelines for how members of your team should be paid based upon their role, geography, performance, and more. 

Without compensation bands in place, compensation decisions can easily become arbitrary. This lack of controls almost inevitably leads to pay inequities. 

Arbitrary compensation decisions also take up valuable time – think of the back-and-forth required between a senior manager and their departmental or functional head – discussing the various merits of raising a team member’s compensation by various amounts. 

If you haven’t gotten started with setting up compensation bands yet, check out our primer on creating compensation bands for the first time. 

3. Have a Compensation Philosophy

Similar to compensation bands, a compensation philosophy is an important best practice for setting up a repeatable compensation management system. 

A compensation philosophy helps to standardize certain key dimensions of compensation management, such as:

• What percentile of market does the company pay? Is this true of all roles and levels, or does it vary?  
• How much should compensation vary for employees in the same role and level? 
• How will compensation vary by geographic location?

Having a robust compensation philosophy is a best practice because it helps to ensure consistency for how to compensate your team, prevents perceptions of unfairness or arbitrariness, and saves time by providing a framework for consistent decisions. 

4. Understand Market Conditions

Compensation markets change rapidly, and understanding what constitutes a competitive offer in a hot labor market is essential – particularly for highly competitive fields. 

One of the best places to gather data on the state of the market is at the point when new recruits are deciding whether or not to join your company. After all, there’s no more accurate signal available than a candidate being willing to accept your job offer and actually start work at your company! 

Tracking the compensation amounts of accepted job offers (and rejected ones, as well!) provides an unambiguous signal on the competitiveness of your compensation offerings, calibrated to your company’s value in the market. 

Many companies track this signal manually in spreadsheets – with Aeqium, you can generate offer letters right from your compensation bands and track their effectiveness, giving you a picture of the market conditions in which you’re operating and informing new offers and compensation bands. 

5. Automate Your Communication

It’s hard to make your team happy through compensation alone, but it’s very easy to make them unhappy through compensation-related actions. One of the most significant sources of compensation-related dissatisfaction that can arise during the compensation management process is failure to communicate compensation changes accurately. 

Some of the ways that compensation communication can go wrong include:

• Communicating incorrect compensation information, particularly when communicated compensation is higher than actual compensation. This is common when managers need to send one-off communications from spreadsheets. 
• Communicating incomplete information – for example, notifying an employee of a 3% cash increase only, when they’re also receiving a significant bonus or equity bump.
• Communicating late, or inconsistently – for example, if managers need to manually send out notifications to their team on compensation changes, managers with a large number of reports may miss the deadline to notify team members. 

And of course, the worst compensation communication is communication that wasn’t meant to be sent at all. 

When using spreadsheets and email to organize compensation information across hundreds or thousands of employees, it’s all too easy for a merit increase or even an entire spreadsheet to end up in the wrong hands. 

One of the key best practices that companies can adopt to handle these communication issues in the short run is to adopt a purpose-built compensation cycle product that will allow them to automate compensation in a bullet-proof way. 

Final Thoughts

In this article, we’ve described several best practices for compensation management: 

1. Leverage Data-Driven Technology
2. Use Compensation Bands
3. Have a Compensation Philosophy
4. Understand Market Conditions
5. Automation Your Communication

Compensation management is a complex topic, but following these best practices can help you to navigate it optimally.