A compensation strategy is a small set of written decisions: how you position pay against the market, how you group jobs into levels and bands, how you split cash and equity, and how you explain all of it. Doing this before you hire in volume keeps offers consistent and helps you avoid costly resets later.
This guide walks you through each decision in order and gives you two templates to copy: a compensation philosophy and a leveling and band worksheet. It deliberately does not include salary or equity figures, because those change quickly and depend on role, location and stage. Use a current data source for numbers.
Write a compensation philosophy
A compensation philosophy explains how pay is structured and why. It covers cash, equity and benefits. Write it down even if you are a team of five, because it will shape every offer and be asked about in most interviews.
Decide the following:
- Market position. Where do you aim to pay relative to the market for companies like yours: below, at or above the midpoint? Name the peer group, for example companies at your funding stage in your hiring locations.
- Cash and equity mix. State whether you lean toward higher cash, higher equity, or a balance, and for which roles.
- Location. Will you pay one rate everywhere, or adjust by location? Pick a rule you can explain.
- What you reward. Experience, scope, performance, or a mix. Be explicit about whether people at the same level get the same pay.
- When pay changes. State when you review compensation, such as at a fixed cycle or on a change in scope, so people know what to expect.
- Negotiation. Say whether you negotiate. A formulaic approach is easier to keep fair, but it only works if you explain it early.
Compensation philosophy template
COMPENSATION PHILOSOPHY: [Company]
Purpose
We want to pay people fairly, attract the people we need at our stage,
and be able to explain every offer.
Market position
We benchmark against [peer group: stage, size, industry, location]
and target [below / around / above] the market midpoint for base pay.
For equity we target [description].
Cash and equity
For [roles/levels], we lean toward [cash / equity / balanced] because [reason].
Location
[One rule: e.g. one band for all locations / bands by geographic zone].
Remote hires are paid [rule].
Levels and bands
Every role maps to a level. Each level has a base pay band and an equity range.
New hires start within the band based on [experience and scope].
What we reward
[Scope, performance, tenure, skills] and [what we do not reward].
When pay changes
We review compensation [cadence, e.g. twice a year] and when
a person's scope changes. Promotions are decided by [process].
Negotiation
[We do / do not negotiate. If we do, what is flexible and what is not.]
Benefits
[Short summary, link to benefits page.]
Owner and review
Owned by [role]. Reviewed [cadence] or after a funding round.Share the finished philosophy with your hiring managers and use it on early calls with candidates. When a candidate hears it in the first conversation, you are less likely to discover a mismatch at the offer stage.
Benchmark with current data
Benchmarking tells you what the market pays for a role, level and location. No single number is right for everyone. A company benchmarks against peers at its stage, while a candidate compares against people in their own network and against other offers.
Choose your data sources
Use at least two, and note which one you used for each decision. Confirm what each tool currently covers before you buy, as products and pricing change.
| Source | What it is | Good for |
|---|---|---|
| Pave | Compensation software that draws pay data from connected HR, equity and recruiting systems, and also supports job pricing, pay ranges and merit cycles | Companies that want benchmarks that update continuously and want to manage bands in one place |
| Carta Total Compensation | Benchmarks for cash and equity built from data on private companies that use Carta, which you can filter by role, level, location and peer group | Startups that already use Carta and want equity benchmarks |
| Levels.fyi for employers | Crowdsourced and verified self-reported pay data, strongest for tech roles, plus employer offerings such as compensation benchmarking | Tech roles, and checking how your offers look to candidates who use the site |
Public salary calculators from job sites can be a quick starting point for a single role, but they are not a replacement for a stage-specific benchmark. Self-reported data can be thin for niche roles or small locations, so treat any single data point with caution.
Benchmark the right way
- Match the peer group to your stage and revenue, not just your headcount.
- Different functions follow different logic. Sales pay is closely tied to revenue and quota structure, finance roles often scale with company stage and budget, and customer success roles may depend on customer count and team size.
- Use a range, such as the 25th to 75th percentile, and decide where inside it you will aim.
- Refresh at least twice a year. Hiring markets move, and your own band can fall behind.
Build job levels and compensation bands
Levels group jobs by scope and ownership, and bands attach a pay range to each level. They let you make consistent offers, explain promotions and show candidates a growth path.
- List your jobs and group them by track: individual contributor and management.
- Define levels with plain-language descriptions of scope, autonomy and impact, not years of experience.
- Map every current and planned role to a level.
- Set a base pay band for each level using your benchmark data and your philosophy.
- Set an equity range per level and decide how it changes with level.
- Check for gaps and overlaps, and test the bands against your current team to find inequities.
Start small. Three to five levels per track is enough for a team of this size, and you can add granularity when you grow.
Levels and bands worksheet
Fill in the pay columns from your benchmark data, not from this guide. Select the table and paste it into a spreadsheet to keep working.
| Level and title | Scope and autonomy | Base pay | Equity | Promotion signal |
|---|---|---|---|---|
| IC 1 [Associate] | Executes defined work with guidance | [range] | [range] | Works independently on defined projects |
| IC 2 [Mid-level] | Owns projects end to end | [range] | [range] | Owns a whole area |
| IC 3 [Senior] | Leads complex work and mentors others | [range] | [range] | Sets direction for a team |
| IC 4 [Staff or lead] | Shapes strategy across teams | [range] | [range] | Impact beyond their own team |
| M 1 [Manager] | Manages a team and owns delivery | [range] | [range] | Team consistently delivers and grows |
| M 2 [Director] | Manages managers and owns a function | [range] | [range] | Function-level outcomes |
IC is an individual contributor track and M is a management track. Below the table, record three things so the sheet stays usable:
- Geographic adjustment: [rule]
- Benchmark source and date: [source, month and year]
- Next review: [date]
Decide on cash versus equity
Startups usually cannot match large companies on cash, so equity and mission carry more of the offer. These are common approaches.
| Approach | When it fits | Watch out for |
|---|---|---|
| Higher cash, lower equity | Later stage, roles where candidates have fewer cash trade-offs, or where the market is competitive on base | The equity story may feel thin, so explain the upside separately |
| Lower cash, higher equity | Early stage, candidates who want ownership and can accept risk | The equity has to be meaningfully large and the candidate has to understand its risks |
| Modest cash and equity, strong benefits | Companies that prefer stability and have a clear benefits promise | You need a clear story for why it is a good deal |
Do not let the cash and equity trade-off get lopsided to the point where the offer looks generous on paper but cannot be lived on. Let candidates choose within a set menu if you have the capacity, and be consistent about the options you offer.
Be careful when you describe equity value. Nobody can promise an outcome, so describe the terms, not the potential return.
Communicate pay clearly
How you present pay matters as much as the numbers. Transparency avoids suspicion and gives candidates the tools to decide.
- Share the range early. Put it in the job posting and on the first call. Many places require it, and compensation requirements for job postings explains how to check your obligations.
- Explain your philosophy briefly, as part of your company pitch.
- Include the full package in the offer. See how to make an offer for the steps.
- For equity, share:
- the type of equity, such as stock options or restricted stock units
- the number of shares offered and the total shares outstanding, so the candidate can calculate their ownership stake
- the vesting schedule and any cliff
- the exercise price and exercise window, if the equity is options
- the valuation from your latest round
- Describe benefits plainly: health coverage, retirement plan and match, time off, parental leave, and remote flexibility. A short benefits page saves repeated questions.
- Encourage questions. Suggest that candidates consult their own tax or financial advisor about equity.
Review and revisit compensation philosophy
Pay decisions go stale. Put a recurring reminder on the calendar.
- After every funding round, check whether your bands and equity ranges still make sense.
- Twice a year, refresh your benchmark data and compare it with your bands.
- When you make an exception, record why and whether it should become a rule.
- Each time you promote someone, check their new pay against the band for their level.
Frequently asked questions
What is a compensation philosophy?
A compensation philosophy is a short written statement of how your company decides pay: where you position cash and equity against the market, what you reward, and when pay is reviewed. It keeps offers consistent and gives you a ready answer when candidates ask how you pay.
How do early-stage startups benchmark salaries?
Start with a source of market data that matches your stage and location, compare at least two sources, and set a band for each level instead of pricing each hire individually. Adjust for your own budget and your cash and equity mix.
Should a startup publish salary bands?
If you hire in a place that requires pay ranges in job postings, you must publish them. Even where it is not required, a range in the posting saves time and avoids misaligned offers.
How do you explain equity to a candidate?
Say what type of equity it is, how many shares they are offered and how many are outstanding, the vesting schedule, the exercise terms and the valuation from your latest round. Encourage them to ask questions and to consult their own advisor.
Need help with compensation? Hire an expert.
Dover's Marketplace connects you with vetted fractional recruiters who have helped founders make hires. They can help you benchmark compensation against the latest market conditions.