compensation-strategy

Files (4)

• README.md
• SKILL.md
• evals.json
• equity-guide.md · references/

SKILL.md (first lines)

## 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.

2. **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.

3. **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.

4. **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.

5. **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 |

From mkurman/zorai, MIT.

More from mkurman/zorai