Salary bands 101: how to pay employees at your startup
Salary bands are tiers or levels within a role that garner higher equity and cash compensation — typically both. Each band typically comes with more responsibility, whether that’s in impact (owning an area of the business) or in managerial expectations. You might use criteria like years of experience, qualifications and skills, budget, job requirements, and market rates specific to work type and location. A candidate is assigned a band when they start, with the idea that, as they progress, they'll climb up that specific band.
Creating salary bands creates transparency within your organization, and helps employees to understand how and when they’ll receive raises, promotions, or adjustments. If expectations are set early on, the goalposts are clear and your team will be better equipped to meet them. Additionally, as you make more senior hires down the road, there will be fewer adjustments on both cash compensation and equity for earlier team members.
For an early-stage company, it’s important to balance the right amount of cash and equity in an offer so that:
- Cash flow is not a stressor for employees and,
- Equity is parsed out in a way that makes sure it’s still available for future hires and refresher grants.
When your departments are starting to take shape (around the 50 to 60 employee mark) you’ll want to create a structured way to assess different bands across roles.
Here are 5 steps to get started:
1. Take stock of all the roles in each department.
When creating levels within a department, you’ll want to assess how your current team would fit into those bands. List out each employee and their title, as well as the requirements and expectations in order to be successful. You’ll also want to include any open roles you have, especially if they’re urgent and will join your team soon.
2. Rank each role across departments.
This process might be based more on intuition and the logical ordering of your team. In fact, teams may structure themselves this way already. Titles are helpful here: a senior or director position is obviously higher in the hierarchy than a new grad. That being said, don’t be too precious about this, but try to see if there is a clear structure and pattern to seniority, responsibilities, and titles. If you have two roles that are close in experience and requirements but different in the title, this can cause you to revise your titles and structure, but we’ll get to that in a bit.
3. Pull market rate data for each role.
Once you have a list of roles within your own company, you’ll want to assess how those line up with market rates. If you have unique job titles or positions, pick the closest or most popular title for the purposes of comparison (i.e. Mobile Engineer might be iOS Developer or App Developer). This will help you determine how much are others paying, and how competitive your offer is (see the comp dataset step above for our recommendations on software to use for this step).
4. Create salary bands and make adjustments for current employees as needed.
When choosing a salary band for your company, you’ll want to assess your current funding, as well as try a few cash/equity calculators to see if your calculations are accurate (we like this slider from Homebrew).
Creating salary bands instead of strict salaries allows teammates to grow in compensation as they grow in their skillset and experience, even if they aren’t ready for a promotion to the next job level/title. Some of your bands may overlap with the preceding or next level to allow for variance in skill within that title.
If you discover that you’re valuing current employees under market, or realize that a team member is making significantly less than other folks of similar skill and experience, you’ll want to make a salary adjustment to get everyone aligned and on the same page before you publish your bands to the company.
For base salary/cash in the early stages, we recommend targeting the 50th percentile. For equity, we recommend targeting the 75th percentile. This will fluctuate as you raise more rounds, but it’s best to compensate more in equity while cash streams are limited.
Below, you’ll find an example of salary bands for an Engineering Manager from Advantage HR/Option Impact data. They surveyed over 1,000 companies and segmented them by the amount of capital raised. You’ll see that if you target the 50th percentile for salary bands, and your company has raised between $0 and $3 million, you’re looking at a base salary of $120K. This number gradually increases as the amount of funding increases.
5. Evaluate salary bands regularly against the job market and cost of living (if you’re not following a remote/hybrid model).
Your salary bands should change as your business grows and in accordance with market fluctuation. A good starting point is to formally reevaluate your structure once a year.