As I talk about in my book Impact, compensation is often misunderstood. While compensation can demonstrate value and convey appreciation, it is not, in my experience, the biggest lever for attracting and retaining mission athletes—the creative, mission driven individuals who keep growing in individual and collective capacity.
Rather, compensation is at best a nonissue and at worst an energy-sapping distraction. When people are well compensated, they put energy into the reasons they joined the team such as impacting the mission and contributing to the team. But if they are under-compensated, their energy gets sapped. And it’s not the money—it’s feeling under appreciated.
So how do you get compensation right? In short, develop a data-driven, flexible approach, and then evaluate the outcomes in the shoes of the recipients. If the outcomes don’t make sense, change the approach. The more flexible you are, the more ad hoc the compensation and the less fair the outcomes across the team. And in the opposite extreme, the more rigid you are, the more everyone lives at the mercy of a spreadsheet.
Here is a primer on the elements that go into determining compensation. One caveat: while the concepts are general, the specifics will become outdated over time.
Third-party compensation data provides cash and stock ranges (also known as salary bands) for specific industries, roles, and skill levels. The more useful datasets also include physical location, team size, and company stage. This is not rocket science if you have the data, and there are a lot of reputable sources available. When working with datasets, keep in mind that the data often lag in time, so anchoring strictly to the data is anchoring to the past. To combat this, let competing offers from your recruiting pipeline inform your own set of real-time salary bands.
Ultimately, you are trying to construct a market picture of fair compensation for a role. In markets with a large labor supply and a broad salary distribution, you can set your team’s bands within your team’s peer group (in size, stage, and location). But in tight labor markets, with narrower salary distributions, you’re partially at the mercy of the big company market makers—partially but not fully. There will always be mission driven individuals looking for the impact they can have on smaller teams; it just may be harder at times than others to find them.
Internal performance levels, in aggregate called a leveling matrix, map internal roles to external salary bands, but they also include team- and role-specific success criteria. The criteria for a software engineer, for example, typically include know-how, quality, complexity, scope, scale, and leadership, among others. As such, a leveling matrix is a multidimensional skill ladder for a distinct area of expertise.
At its best, a leveling matrix goes beyond mapping skill with compensation to defining a mastery road map for each specific role. Rooted in market data and emanating from thoughtful design, a good leveling matrix establishes a foundation of competence, fairness, and mastery-seeking for the entire team. As a result, it ties compensation conversations first and foremost to mastery and personal growth.
At its worst, though, a leveling matrix introduces bureaucracy when it loses flexibility and relevance, doesn’t evolve, becomes overly complex, creates multiple approval tiers, and institutionalizes rules rather than guidance. So review your leveling matrix regularly to ensure its relevance to where the team is today and where it is heading next. And maintain the simplest possible matrix, resisting the urge to overprescribe, which can lead to energy-sapping complexity.
Finally, step someone up in compensation when they have leveled up in mastery, not months later when the clock strikes “annual review.” Meeting a person’s moment builds a culture of responsiveness and achievement, and waiting for dictated times builds a culture of rule-following and deferred action.
A band percentile target is the default percentile at which you quote compensation for new hires and promotions. Does someone start at the 25th percentile of their band, giving them a lot of headroom for raises, or at the 75th percentile to underscore that you pay above average. I prefer the latter, but I also prefer smaller teams of high-caliber people. And because I know I’ll exit people when needed, I assume success, pay generously, and correct otherwise.
In a competitive market, I’d rather tell the story that the team pays above average than suggest that we’re bargain hunting. Nothing says under-compensated to growth-oriented people like the 25th percentile. For promotions, it’s easier to start toward the bottom of a band because that is usually (though not always) a compensation bump and is consistent with a narrative of future expected growth.
Finally, keep your bands up to date, calibrated to your peer group. That can be difficult in rapidly changing conditions, particularly if compensation changes faster than your strategic progress (in revenue or fundraising). But it is essential to embrace market reality to remain competitive.
Band busters are people who defy salary bands due to some sort of exceptionalism. Hiring the person who invented FLAC (Free Lossless Audio Codec ) to lead your music compression team, for example, might yield an offer that exceeds even your highest salary band. For it to have potency, though, band busting cannot apply to everyone, nor can it happen often. To codify exceptionalism and avoid confusion, call out band busters explicitly so the categorization is transparent to all involved.
Keep in mind that band busting is a skill to master, not an easy out. The more you use it, the more uneven your overall salary distribution will become. Busting should therefore be reserved for true exceptions, which means there is general agreement in its application to the person involved.
Busting a band is far preferable to leveling someone up artificially to get them a higher compensation. That undermines mastery. It is far better to bust a band and manage some outliers than it is to compromise mastery.
Calibrate your system regularly, both through individual salary negotiations and periodic holistic team reviews. Does it make sense in aggregate how people are leveled and how they are compensated within each level? Or does it make sense that the people toward the top of the compensation stack belong there relative to the people below them?
When doing these reviews, some people prefer a full stack ranking of the entire team (an ordered sort from first to last), but I’m not convinced you have the information granularity and clarity for such precision or that the ranking won’t be different a week later. Look at macro trends and their outliers to make sure the system is working. It matters far less if a person is ranked 15 rather than 14 than it does if they are ranked 15 instead of 5.
Conduct holistic reviews with all relevant team leaders to gut check biases and calibrate criteria. If the system does not make sense, revisit the system. The system must serve the mission and its people, and this is an easy way to ensure that it does.