4 Common Mistakes Startups Make When Setting Pay for Hybrid Workers

Published originally in TechCrunch's Extra Crunch

 

Leaders and senior management everywhere are grappling with how (or not) to bring employees back to the office. It’s a high-stakes decision: Fifty-eight percent of workers said they will look for new jobs if they can’t work remotely, according to a FlexJobs survey.

An often overlooked and/or cobbled-together piece of this puzzle is compensation. And inside the transition to hybrid work, compensation planning encapsulates a cacophony of nuances for founders, people leaders and compensation experts.

 

Here are just a few new questions this group needs to answer:

  • Do we adjust salaries for people who have moved to different regions?
  • Do we alter pay for employees performing the same role, with the same title, when one is remote and the other is in-office?
  • How can we educate geographies that aren’t as familiar with the value of equity as is, say, Silicon Valley?

As we’ve seen in recent weeks, the answers to these questions are different for us all. Google employees who work from home may experience a pay cut. Adobe workers can self-select what days they work remotely, up to 50% of the time, with no salary impact. Meanwhile, LinkedIn just loosened its policy, allowing employees to work from home permanently.

 

The first step in developing a compensation plan — regardless of your company’s stance on distributed work — is determining how your team’s pay compares with the market.

 

Regardless of your startup’s stance on the topic, having a consistent compensation philosophy that you apply to your evolving workplace has a unicorn-sized influence on important growth metrics: attracting and keeping top talent, as well as creating a culture of trust and performance.

As the CEO of a compensation intelligence company, I see four common mistakes that startups commit when compensation planning that hinder successful remote or hybrid workforces. Here are the ways to sidestep them.

  1. Using subpar data for competitive analysis

The first step in developing a compensation plan — regardless of your company’s stance on distributed work — is determining how your team’s pay compares with the market. To understand market rates, you need one thing: data.

 

If you’re moving from a strictly office-based environment to a hybrid model, 2019 data won’t work. While it’s tempting to search for free data online or use survey data that your company has purchased in the past, both approaches have risks. Traditional compensation survey information is stale, limited and often not verified. And spreadsheets are hyper prone to error and security risks because they involve manual, and often super laborious, work.

 

In a world that’s still reacting to a pandemic, only fresh, real-time, accurate benchmarks and pay ranges are sufficient. Both must reflect aggregated information about what others in your segment are paying employees — by experience level, role, department, geography, industry and company size.

 

For example, technology startups need different data sources than global financial services organizations. Both need information geared toward companies of a similar size and stage. Software engineer salaries need to reflect those of similar roles, with nuances for those that specialize in machine learning, data science, etc.

 

You’d be shocked how often self-reported data on free websites is inaccurate and unverified. As you seek a credible intelligence source for your compensation data, a data source must:

  • Hail from a trusted and verified source, like a human resources information system (HRIS), or human resource or compensation professional.
  • Provide a representative sample, so your trust is well placed.
  • Adequately match the job description with the position(s) being benchmarked with knowledge, skills and experience.
  • Take total compensation, such as base salary, total cash and equity, into account.
  • Be current, continually updated and verified.
  1. Neglecting to define a compensation philosophy

When pay is handled on a discretionary basis without a compensation philosophy, it is difficult to normalize. That’s especially problematic in hybrid workplaces, where consistency is key. (Otherwise, you risk attrition, especially of your superstars.)

 

A compensation philosophy explains the “why” behind your decisions. It generally takes the form of a written document that outlines how your startup plans to pay and reward the team, based on a set of principles and values. Here are some questions to ask as you hone yours:

  • What core principles guide our compensation philosophy?
  • How do we prioritize compensation spend?
  • Do we want to pay at or above marketing averages?
  • Are particular groups more important to us, such as engineering or leadership?
  • Will we apply geographic differentials to pay?
  • How will we reward and differentiate pay for performance?
  • What are our pay equity practices?

Your compensation philosophy defines your market position. It determines how you prioritize compensation spending, such as whether you want to pay engineers above market. It provides clarity by specifying if compensation will be adjusted for remote work or regional differences.

Startups that update compensation to reflect a hybrid work policy must also update their compensation philosophies.

  1. Overcomplicating regional differences in pay

One of the biggest questions business leaders must determine when moving to a hybrid model is whether to adjust pay based on location. Geographic differentials (i.e., changing pay based on the local cost of labor) are a simple way to manage this process and continue to pay competitively for talent in local markets.

 

Well-intentioned startups can easily go a step too far without proper guidance. Unless you’re the federal government or a multinational corporation, you’re likely to overcomplicate your compensation plan — and hamper your ability to scale quickly — by setting hyperlocal pay rates based on ZIP codes.

 

Instead, consider aggregating cities and metropolitan areas into tiers, based on the cost of labor. (Note that cost of labor is different from cost of living!) This way, your framework can easily scale to include new locations.

  1. Insufficiently educating employees about your plan

Communication is key when making compensation changes, but communication without education can cause more harm than good.

  • Step 1: Share an overarching message about your compensation philosophy. How are you thinking about remote and hybrid work? What influences will it have (or not) on pay? What factors will influence pay? For example, you might say, “We’re moving to a hybrid workplace, and the pay ranges that we’ll use will reflect local labor markets.”
  • Step 2: Pause for questions. Help your team understand how decisions will be made and applied fairly. For example, “We plan to pay at 50% market rate for all departments.” For a long time, compensation has lived in a black box. People need information and training. Pay transparency isn’t an all-or-nothing scenario; it’s a spectrum of how much and when to share information.
  • Step 3: Leave the door open. Employees should have the opportunity for discussion with their manager around significant changes, particularly those that impact them. Equip your managers with the knowledge and data to support those conversations.

Ultimately, moving to a hybrid workforce provides flexibility to employees — and can help you tap into talent pools across the country. If you use compensation as the strategic lever that it is when making this transition, you can up your game with every top startup’s secret sauce: employees and desirable candidates.