A Counterintuitive System for Startup Compensation

Molly Graham helped structure compensation at Facebook and now Quip. She's emerged with these rules for creating a fair, motivating system.

When Molly Graham joined Facebook, the company already had 400 employees, but there was no official performance or compensation system in place. There had been attempts, but nothing stuck. The result: Very little transparency, a lot of one-off compensation decisions, frustration and confusion. Working closely with Sheryl Sandberg and HR chief Lori Goler, Graham set out to change this by going back to the basics.

“It gave us a chance to start from the beginning and say to everyone, ‘Okay, here is how salary works. Here is how equity works. Here’s how bonuses are calculated. We’re using formulas for all salary increases from now on. Here are the multipliers based on performance,’” she says. “People frequently find compensation and performance management overwhelming or bureaucratic, but we got such a positive response when we implemented this first system and explained it to the company. People were grateful. A system that was relatively simple, clearly communicated, and fair made a huge difference.”

Graham emerged on the other side realizing how valuable a solid, standardized compensation system can be. Today, as Head of Business Operations at Quip, she believes that there is a simple, scalable, transparent compensation system that will work for almost all startups. Here, she shares some of her golden rules for compensation and the system that she thinks strikes the fine balance between a startup’s needs and keeping employees happy.

Since joining the start up world, Graham has talked with a lot of start up founders who struggle with compensation questions like:

• What do you offer to a new hire, particularly a senior leadership role? What if they ask for more?
• What do you do about one-off salary or equity increase requests?
• What do you do about high performing recent graduates?
• How and when should you offer increases or promotions?
• Should you counter offer if one of your employees gets a higher offer?

“I was lucky to learn from the leadership at Facebook and people like Sheryl, and now I see a lot of founders and start up CEOs spending (or frankly, wasting) a lot of time handling one-off compensation requests or new hire offers, and I desperately want to save them the time," she says. "In my opinion, compensation isn’t something you should spend a lot of time on in the first couple years of a company. As a CEO, you should be focused on making your company successful, which in turn, makes the equity more valuable. That is what you and your employees should spend all your time on.”

Some Golden Rules for Compensation

1) No one is ever happy with compensation, and compensation has never made anyone happy. “This is honestly the number one trap that people fall into with compensation,” Graham says. “Compensation is never going to be the thing that makes people join or stay at a startup long-term (or any company), nor should it be. Compensation is not a healthy version of retention. I know it’s terrifying when someone has a huge counter offer, or you’re trying to recruit that senior leader from a big company, but you should accept upfront that it's better if they join for the people, buy into the vision, etc., and have to make a hard decision on compensation. They will stay longer. Your goal should be to get compensation off the table — make sure that they can live on their salary and have a fair slice of equity — so employees don’t think about it except maybe once a year. The best way to do that is to be fair and transparent.”

2) People always find out what everyone else is making. Never build a compensation system that assumes people won’t know what their peers and teammates are making. They always find out.

“Ask anyone who has managed a team of over 10 people — everyone finds out eventually, and the problem is that feelings about compensation are relative not absolute,” says Graham. “You might be living really well. You might be in the wealthiest 1%, but if there’s someone sitting next to you who makes twice as much, you’re going to feel insulted. It’s just a fact. So take that into account when you’re creating your plan. You need to be able to explain (and defend) everything through a logical set of guidelines.”

3) Create a system that revisits compensation only 1-2x a year. Startup CEOs have so much going on that they shouldn’t burden themselves adjusting people’s pay on an ongoing basis. This is the logic behind annual compensation evaluations. The single most important thing any employee can do is add value to the company, which will add value to the equity. This should be the prevailing message around compensation.

4) On the spectrum between formulaic and discretionary compensation, be as formulaic as you can. “It's really, really hard to predict the long-term at a startup,” says Graham. “If you start using discretion too early about new hires or new performers, you’re going to set yourself up for long-term problems you can’t anticipate.”

The System

It’s not unusual for a young company to hire someone for twice what they're paying other people in a similar role because they don’t want to lose the hire. But this impulse can lead to damaging imbalances, widespread unhappiness on the team, and overblown expectations for the individual.

“Before you ever give anyone numbers, you need to have a conversation about how your company thinks about compensation — salary, equity and how they’re managed,” says Graham. “Don’t jump to the numbers, first explain the framework. That will start things off on the right foot.”

When You Hire Someone

Startups have a particularly hard time towing the line at this part of the process. “Founders don’t want to draw hard lines because they feel this need to do anything to get talented people in the door, but they’ll end up paying for that decision later,” says Graham.

One of the best things you can do with new hires is not negotiate. “Negotiation on salary and equity can reward the wrong kind of people and the wrong kind of behavior,” says Graham. “If you negotiate, you're primarily rewarding people who are good at negotiating.” This is probably not the skill set you’re focusing on hiring at an early-stage startup, and talented engineers are often not the strongest negotiators.

So what should you do? One of the simplest ways to find a fair base salary for someone is to create three different levels — that way you leave room for people to grow — and pay everyone at the same level the same amount. That makes leveling your people the only discretionary part of the system.

For equity, you also have to figure out the starting place that's right for your company, but employee number is an easy proxy for the amount of risk people took when joining. That way you can decrease the percentage of equity you give out by a set amount for each employee that joins. Graham recommends comparing this percentage to market rates to make sure you don’t fall behind — but do keep in mind that equity is not equivalent between companies.

Using this system, Graham provides an example that should work for a post-Series A company:

Annual Milestones & Performance Reviews

Notably, she proposes keeping salaries the same for senior executives working in engineering and marketing/operations. This goes back to the desire for fairness, that salary information is never opaque, and the need to generate a feeling that everyone is working together to make the company a success. “Remember that if you value the business side of your company differently from the engineering side, you are sending a cultural message. That doesn’t mean it’s wrong, it’s just good to be conscious of.”

Graham suggests reviewing compensation on a formal basis once a year for the following reasons:

• It enables you to defer all compensation conversations to just this one time.
• It allows you to do the research to ensure that all salaries are still even with the market.
• It gives you all the data you need to decide whether to offer high performers more salary or equity.

While Graham recommends scheduling compensation reviews in December or January, she says startups should do whatever is right for their business. There might be different seasonality that dictates when this should happen — ideally when people and managers have the time and energy to be thoughtful about their peers.

Startups should avoid performance-based increases for the first couple years an employee is with the company. As an early employee, most of the value people should be getting is the increase in the value of their equity as the company grows. Giving people performance bumps will get complicated and potentially unfair fast.