On pay philosophy

Structuring compensation in modern organisations

After a number of conversations with clients about how to put more structure around pay in place as a company scales, I wanted to share what I know about creating those structures and a philosophy behind that.

Job and Role Structure

The foundation of any pay philosophy is a clear job and role structure. This hierarchy typically includes:

1. Job Function or Profession: these are broad categories such as engineering, product, or marketing.

2. Job Family or Practice: these are specific areas within a function. For the engineering function/profession, these might be software engineering, site reliability engineering, quality assurance testing and more. For the design profession these might include user research, interaction design, content design and many others.

3. Career Tracks: These are typically divided into three main categories:

a) Professional Track: here you would have the specific role occupied by an individual. For instance Software Engineer, Data Engineer, Architect, Platform Engineer. These would have the same levels across the different roles, and might include: Associate, Engineer, Senior, Staff, Principal. I wrote more on levels specifically if you want to go deeper. Some companies have an additional profession track.

b) Managerial Track: These are typically ‘manager’ and ‘director’ titled roles, with people responsibility. Levels tend to include: Associate, Manager, Senior Manager, Director, Senior Director.

c) Executive Track: These are for more functional and senior leadership roles of Vice President, President and the C-suite. Levels include: VP, Senior VP (SVP), President, Chief Technology Officer, Managing Director.

It's important to note that the structure can vary depending on organizational needs. For instance, architecture might be its own family rather than a role within engineering, or executives might be treated as a separate function entirely.

Additionally, some roles may be combined or split based on the company's requirements. For example, you might have separate front-end and back-end engineer roles, or simply use "software engineer" as a broader category.

Below is how I’ve seen these levels line up across tracks. Note that a Principal tends to be at the Director level, and Senior at the Manager level.

Benchmarking

To ensure competitive compensation, companies often use various benchmarking sources:

1. Industry Data: Providers like Rashford, Mercer, and Willis Towers Watson offer survey-based data from employers. This data can be tailored to specific sectors, locations, and comparable companies, with more detailed information typically coming at a higher cost.

2. User-Reported Data: Platforms like Glassdoor and Reed provide insights based on employee-reported salaries. This could also come from staff reporting offers they have heard about or received from competitors.

3. Emerging Platforms: Newer players like Ravio are entering the market with fresh approaches to compensation data.

Compensation Ratio (Compa Ratio)

Now with role structure and benchmarking data, we can start to build pay bands. The compa ratio is a key tool in structuring pay ranges:

• A midpoint is typically selected for each job level, with lower and upper bounds set using a percentage or ratio, say 80%-120% or 0.8-1.2

• It's advisable to have some overlap between levels. This means the upper bound of one level should be higher than the lower bound of the next level.

• This overlap provides flexibility in hiring and promotion decisions, allowing for situations where higher pay might be offered without a level change, or where a promotion doesn't require a dramatic leap in compensation.

The following is an example, showing 100 at the mid range for the mid level, and working on a 0.8-1.2 ration from there.

Regional Considerations

One of the more controversial aspects of modern pay philosophy is how to handle regional differences. The controversy comes from the question of in a remote world, if someone is doing the same job, why should where someone lives make any meaningful difference. I’ll leave the reader to that exercise but offer the thoughts of how companies structure this:

Some companies implement different pay structures based on an employee's location, whether between countries or within the same country. One approach is to apply the same benchmarking and compa ratio principles to each region separately. This is a more rigorous approach, and will take time and money (to get survey data) to accomplish.

Alternatively, some employers use a ratio system, adjusting pay up or down from a primary location based on regional factors. Say location A is a low cost country, so a ratio of 0.7 is applied to the pay ranges; location B is a higher cost country, so a ratio of 1.15 is applied.

The debate around regional pay differences continues to evolve, especially as remote work becomes more prevalent.

Conclusion

As companies scale and “professionalise”, there is often a desire to have a better handle on pay for employees. This comes from both employees and the employer. It can help create fairness and in some cases transparency. I’ve walked through how I’ve seen these bands created, and hope this is useful either for companies going through this for the first time, or for individuals to better understand this within the organisation they work within.