“I think the important thing in this phase is not to anchor too much on how things used to be, but more on where are we right now and where is the market at right now.”—Meghana Reddy, Advisor at Alamere
For tech startups, the three levers of compensation—base salary, bonus, and equity—are seeing drastic shifts from the heydays of 2020 to 2021.
While every startup has its own circumstances to consider, some best practices around compensation still prevail. To help CEOs, founders, and People leaders at GGV’s portfolio companies better understand how the current market is impacting compensation, we turned to two experts for their real-time insights:
Based on frequently asked questions about cash- and equity-based comp at startups, here are some of the changes that you can expect to see today:
In general, base salaries are plateauing, and many startups are doling out merit increases rather than across-the-board raises.
“Instead of ‘peanut-buttering’ that increase across with everyone getting a 2% or 3% [raise], most of the people we work with are saying: ‘We're going to use that pool to differentially reward high performers,’” Meghana says.
Entry-level salaries are also likely to come down, and inflated salaries in non-critical functions are readjusting.
Geographic-based compensation tiers are also leveling out. According to Meghana, workers in cities like Los Angeles and Seattle may see 95% of the base that a San Francisco- or New York City-based employee enjoys. Meanwhile, workers in Boston and D.C. might see closer to 90%, and other locations may come in at 80%-85% of the Bay Area premium.
Exceptions include hard-to-hire technical roles and generative AI-focused roles, which “remain at an extreme premium,” Glenn says.
That said, we’re not yet seeing companies implement strategies that emerged during the Global Financial Crisis—this included cutting salaries by 10%-20% to avoid more layoffs and/or executives taking deferred cash comp to reduce cash outlays, Glenn says.
With many companies reducing bonus programs, payouts are still occurring but perhaps at lower levels like 60% instead of 100%. For leaders responding to worried employees, it can help to remember that “compensation isn't personal. It's supply and demand, but it always feels personal to people,” Meghana says.
She recommends framing any messaging with reminders like:
Leaders may also want to offer more context such as:
As with base salaries, “you can't just rely on what was done two or three years ago. It has to be really rethinking [equity dilution],” Meghana says.
Survey data from sources like Pave often lags behind and represents a different era, Glenn adds. Instead, he recommends focusing on: “What are fair, reasonable, and motivating programs?”
Here are some tactics that both Meghana and Glenn are seeing startups implement today:
Consider repricing recent grants rather than issuing more shares: This retention strategy is often done selectively for employees who were hired in 2022 and 2021, Meghan says. The stigma formerly attached to rerunning 409A models or repricing options is also largely gone, Glenn adds: “In the current environment, it's so well understood that the equity markets have vastly changed.”
Examine vesting schedules, but be aware of the trade-offs: For new-hire grants and refresh grants, there are other ways to reach the same dollar amount per year of economic value. For a typical four-year grant, for example, “because equity prices have come down so much over the past 12-18 months, with the same number of shares you granted in 2021, in today’s market perhaps you’re giving half that value given current equity pricing,” Glenn says. “But if you make this grant a two-year vest, your employee will see the same economic value vesting per year as before. The problem is, of course, you’re now shortening the duration of the grant, and it's less retentive as a result.”
Consider weighing questions like:
Remember: “Companies at certain stages should only subject themselves to a certain amount of dilution on an annual basis. These grants are not free,” Glenn says. “And thinking through that as you're designing your program year by year is important.”
Given the reality that many sales teams won’t hit their quotas, it may be time to pull other levers that are within your control.
“There is no one-size-fits-all answer,” Glenn says. “But I do think it's really important that companies have very tough conversations and really talk about balancing the need for overall growth with the need for healthy growth—not high-calorie growth. And if you get that balance right, it may mean removing some sales teams… [and] allowing those who remain to be more successful.”
First of all, every company should start with an overall compensation philosophy: How does your startup differ from your talent competitors?
From there, each department will likely have different pay bands for similar titles. That said, it may not make sense for a 20-person team to have 10 pay bands. “As you get much bigger, you're going to get more specific because you're trying to hire a security expert and it's going to be a slightly different level of compensation,” Meghana says.
“I think it's very normal for companies in the early stages to be very ad hoc in how they compensate folks,” Glenn adds. “And I think the quicker companies can get to a philosophy [and] framework that seems fair, the better.”