compensation-strategy

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Compensation Strategy

A structured framework for designing, benchmarking, and communicating compensation programs. This skill covers the full total rewards stack - from salary bands and equity grants to leveling frameworks and pay equity audits - with an emphasis on when to use each approach and how to justify decisions to candidates, employees, and leadership.

When to use this skill

Trigger this skill when the user:

• Benchmarks a role against market data (Levels.fyi, Radford, Mercer, Carta)
• Designs or revises pay bands for a level or job family
• Structures an equity grant (ISOs, NSOs, RSUs) or refresh program
• Builds or updates a leveling framework (IC and/or management tracks)
• Creates a total rewards package (salary + equity + benefits + perks)
• Conducts or responds to a pay equity audit
• Writes or revises a compensation philosophy document
• Explains compensation structure to a candidate or employee

Do NOT trigger this skill for:

• Recruiting sourcing tactics or interview process design (use a hiring skill)
• Payroll processing, tax withholding, or benefits administration (use an HR

operations skill)

Key principles

1. Pay transparency builds trust - Employees who understand how pay is

determined are more engaged and less likely to leave over perceived unfairness. Document your philosophy, publish band ranges internally, and explain progression criteria clearly. Opacity breeds resentment.

1. Market data, not gut feel - Compensation decisions made from intuition

drift out of market over time and introduce bias. Anchor every band to at least two external data sources refreshed annually. "We've always paid this way" is not a compensation strategy.

1. Total rewards, not just salary - Base salary is one line in a larger

equation. Equity upside, health benefits, PTO policies, remote flexibility, and career development all have real economic value. Design and communicate the full package - candidates and employees do math.

1. Equity is a retention tool - Equity without a vesting schedule is a

signing bonus. Structure grants to align long-term incentives: 4-year vesting with a 1-year cliff is the standard, but refresh grants and accelerated vesting on change-of-control matter equally. Design equity with departure scenarios in mind.

1. Review annually at minimum - Markets move. Inflation erodes purchasing

power. Competitors raise bands. A compensation structure that was competitive 18 months ago may be 15% below market today. Schedule mandatory annual reviews; trigger ad-hoc reviews when attrition spikes or a survey shows significant movement.

Core concepts

Compensation components

| Component | Description | Typical form | |---|---|---| | Base salary | Fixed annual cash paid on regular schedule | Bi-weekly or semi-monthly paycheck | | Variable/bonus | Performance-linked cash paid periodically | Annual bonus, quarterly MBO, commission | | Equity | Ownership stake in the company | ISOs, NSOs, RSUs, ESPP | | Benefits | Non-cash protections and programs | Health, dental, vision, 401(k) match | | Perks | Discretionary extras | Remote stipend, L&D budget, PTO |

Total compensation (TC) = base + expected bonus + annualized equity value + benefits value. When comparing offers or setting bands, always use TC - base-only comparisons are misleading, especially at senior levels where equity is the majority of value.

Market percentiles

Compensation surveys report pay at percentiles of the market. The standard anchor points:

| Percentile | What it means | Typical use | |---|---|---| | P25 | 25% of market pays less | Below-market, acceptable for high-equity early-stage | | P50 (median) | Middle of market | Default anchor for most companies | | P75 | 25% of market pays more | Above-market, used to compete for talent in hot roles | | P90 | Top decile | Reserved for critical roles or FAANG-adjacent competition |

Most companies target P50 base + P75 equity, or P75 base + P50 equity. Decide your strategy based on what stage you are at and where you want to compete.

Pay bands

A pay band (or salary range) defines the minimum, midpoint, and maximum for a given level. Key parameters:

• Spread: max - min, expressed as a percentage of the midpoint. Typically

50-80% for individual contributor roles. Wider bands allow more flexibility; narrower bands reduce manager discretion.

• Midpoint: the target market rate (usually P50 or P75 of survey data).
• Overlap: adjacent bands share some salary range, allowing a high performer

at L3 to earn more than a new hire at L4 without an immediate promotion.

• Compa-ratio: employee's salary / midpoint. 100% = exactly at midpoint.

Ranges of 85-115% are typical. Outside this range triggers a review.

Equity types

ISOs (Incentive Stock Options), NSOs (Non-Qualified Stock Options), and RSUs (Restricted Stock Units) are the three main forms. See references/equity-guide.md for detailed comparison, tax treatment, and vesting patterns.

Vesting schedules

The standard is 4-year total vesting with a 1-year cliff:

Year 1: 0% vests (cliff period) -> 25% vests at 12-month cliff
Years 2-4: monthly vesting at 1/48th of total grant per month

Variations to know:

• Back-weighted vesting (10/20/30/40): rewards long tenure, retains people

longer but feels unfair early on

• Monthly from day one (no cliff): common at later-stage or public companies

for senior hires

• Refresh grants: new grants issued annually or at promotion to top up

unvested equity and reset retention incentives

• Acceleration: single-trigger (on change of control) or double-trigger

(on change of control + involuntary termination) - always use double-trigger for employees

Common tasks

Benchmark a role against market

Goal: Determine whether current or proposed pay is competitive.

Data sources by use case:

| Source | Best for | Cost | |---|---|---| | Levels.fyi | Public tech companies, IC engineering/PM | Free | | Carta Total Comp | Startups (pre-IPO), equity benchmarking | Paid | | Radford (Aon) | Enterprise tech, broad job families | Paid (survey participation) | | Mercer | Non-tech industries, HR and operations roles | Paid | | Glassdoor / LinkedIn Salary | Directional check, wide variance | Free | | Option Impact / J.Thelander | VC-backed startup equity norms | Paid |

Methodology:

1. Define the job family and level precisely (use internal level definitions)
2. Pull data from at least two sources at the same percentile target
3. Normalize to the same geographic region (use location factors for remote roles)
4. Compare TC, not just base (include equity at current 409A or public price)
5. Document sources, date pulled, and percentile used - this becomes the audit trail

If two sources diverge by more than 15%, pull a third source and average the

two closest. Do not cherry-pick the lowest to justify underpaying.

Design pay bands

Step-by-step:

1. Decide your percentile target (P50 for market-rate, P75 for above-market)
2. Set the midpoint to that percentile for each level
3. Apply a spread: 50% spread means min = midpoint 0.75, max = midpoint 1.25
4. Check band overlap: adjacent bands should overlap 15-25% to allow flexibility
5. Validate existing employees fall within or near their band (flag outliers)
6. Set a review cadence (annually minimum; trigger on survey data shifts >5%)

Example band structure for a 4-level IC track:

| Level | Midpoint | Min (75%) | Max (125%) | |---|---|---|---| | L1 | $100k | $75k | $125k | | L2 | $130k | $98k | $163k | | L3 | $170k | $128k | $213k | | L4 | $220k | $165k | $275k |

Bands should be wide enough to reward growth within a level without requiring

promotion, but narrow enough that managers cannot rationalize