claude-skills-reference/c-level-advisor/chro-advisor/references/comp_frameworks.md

Compensation Frameworks Reference

Salary bands, equity design, total comp modeling, comp philosophy, and raise/refresh processes.

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Comp Philosophy — The Foundation

Before building bands, define your philosophy. Ambiguity in comp philosophy = pay equity lawsuits and trust erosion.

The five decisions:

1. What market percentile do you target?

• P25 (below market): Only viable with exceptional mission, equity, or growth opportunity. Flight risk is high after 18 months.
• P50 (market median): Standard for most Series A–B companies. Competitive without premium.
• P75 (above market): Premium talent strategy. Used by high-margin or talent-intensive businesses. Netflix model.
• P90+: Top-of-market for specific functions (ML at AI companies, senior engineers at FAANG feeders).

Common hybrid: P50 base + above-market equity = total comp at P65–75.

2. What's in your total comp package?

Define each component explicitly:

• Base salary — cash, market-benchmarked
• Variable / bonus — % of base, tied to what criteria
• Equity — options vs. RSUs, vesting schedule, refresh cadence
• Benefits — health, retirement, PTO policy
• Learning & development budget
• Remote/location allowances

3. Are bands public internally?

Recommended: Yes. Pay transparency reduces equity complaints, builds trust, and forces you to maintain clean bands.

4. How often do you refresh bands?

Minimum: annually. High-growth markets: every 6 months (engineering specifically in hot markets).

5. How do you handle individual negotiation?

Options:

• Fixed bands, no negotiation (Buffer model) — simple, fair, loses some candidates
• Band range with manager discretion — most common, requires calibration guardrails
• Individual negotiation within band — flexible, creates pay equity drift over time

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Salary Bands: Construction

Step 1: Define levels

Standard IC levels (adapt to company):

Level	Title example	Scope
L1	Junior / Associate	Execution with guidance
L2	Mid-level	Independent execution
L3	Senior	Leads workstreams, mentors L1-L2
L4	Staff / Principal	Cross-team technical leadership
L5	Distinguished / Fellow	Company-wide technical direction

Management track:

Level	Title	Scope
M1	Manager	Team of 4–8 ICs
M2	Senior Manager	Manager of managers or larger team
M3	Director	Function or large org
M4	VP	Business unit, company-wide
M5	SVP / C-Suite	Executive

Step 2: Gather market data

Data sources (by quality):

1. Radford / Aon — Gold standard. Expensive ($10K+/year). Worth it at Series B+.
2. Levels.fyi — Excellent for engineering. Free. Self-reported but large sample.
3. Glassdoor Salary — Broad coverage. Less precise for startups.
4. Pave / Carta Total Comp — VC-backed companies. Good peer benchmarking.
5. LinkedIn Salary — Free tier. Reasonable signal for G&A roles.
6. Offer letter data — What candidates are bringing from other companies. Real-time signal.

What to pull: P25, P50, P75, P90 for each role × level × geography.

Step 3: Set band structure

Band width (range within a level):

• IC bands: 80–120% of midpoint (i.e., ±20% from center)
• Manager bands: 85–115% of midpoint
• Wider bands allow room for differentiation within level; narrower bands reduce pay equity drift

Band overlap between levels:

• 10–20% overlap is normal (top of L2 overlaps with bottom of L3)

• 30% overlap: your levels are too close together

• No overlap: new hires jump too much between levels (compression risk)

Example engineering band structure (US, Series B company, P50 target):

Level	Band Min	Midpoint	Band Max
L1 Software Engineer	$90K	$105K	$125K
L2 Software Engineer	$115K	$135K	$160K
L3 Senior SWE	$150K	$175K	$205K
L4 Staff SWE	$195K	$225K $260K
M1 Eng Manager	$175K	$205K	$235K
M2 Sr Eng Manager	$215K	$250K	$285K
M3 Director, Eng	$255K	$300K	$345K

Adjust by 15–25% for non-SF/NYC markets. Adjust -40% to -60% for European markets.

Step 4: Place employees in bands

Compa-ratio = Employee salary / Band midpoint

Compa-ratio	Interpretation
< 0.85	Below range — immediate risk
0.85–0.95	Developing in role
0.95–1.05	Fully performing (target zone)
1.05–1.15	Senior/expert in role
> 1.15	Above range — flag for review

Audit report: Run quarterly. Flag anyone below 0.85 (flight risk) or above 1.15 (overpaid for level, or needs promotion).

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Equity Frameworks for Startups

Option Basics

ISO vs NSO:

• ISO (Incentive Stock Options): For employees. Favorable tax treatment if held 1+ year post-exercise.
• NSO (Non-Qualified Stock Options): For advisors, contractors, sometimes employees. Taxed as ordinary income on exercise.

Strike price: Set to 409A valuation at grant. Lower is better for employees. Early employees win on strike price.

Vesting schedule standards:

• 4-year vest, 1-year cliff: Standard
• 4-year vest, 6-month cliff: Startup market adapting to faster pace
• 1-year cliff means: nothing until 12 months; monthly or quarterly after

Post-termination exercise window (PTEW):

• Standard: 90 days. Often too short for employees who can't afford exercise.
• Better: 1–5 years or until IPO. Use as a talent differentiator.
• Companies extending PTEW: Stripe, Airbnb (pre-IPO), Square, most employee-friendly startups.

Equity Grant Ranges by Stage and Level

Expressed as % of fully diluted shares at grant. Ranges vary significantly by market, stage, and funding.

Seed stage:

Role	Equity %
Co-founder	20–40%
First engineering hire	0.5–1.5%
First non-technical exec hire	0.25–0.75%
IC (L2-L3)	0.1–0.4%
IC (L3-L4)	0.2–0.6%

Series A:

Role	Equity %
VP / Head of function	0.3–0.75%
Director	0.1–0.3%
Senior IC (L3)	0.05–0.15%
Mid IC (L2)	0.02–0.08%
Junior IC (L1)	0.01–0.05%

Series B:

Role	Equity %
VP / Head of function	0.1–0.3%
Director	0.05–0.15%
Senior IC (L3)	0.02–0.07%
Mid IC (L2)	0.01–0.03%

At Series B+, equity is increasingly expressed in dollar value (grant value = X shares × current 409A). Use Carta or Pulley to model dilution.

Equity Refresh Program

Why it matters: Employees hired at Series A with 4-year vesting will be fully vested by Series B. No unvested equity = no retention hook.

When to refresh:

• After every significant funding round
• Annually for high performers (top 20%)
• After promotion (role-commensurate top-up)
• Counter-offer situations (use carefully — signals you underpaid initially)

Refresh models:

1. Anniversary grant: Annual cliff-free refresh for all employees above a performance threshold
2. Evergreen model: Continuous vesting maintained — refresh annually so employee always has 2–3 years remaining
3. Event-based: Refresh tied to milestones (promotion, funding, annual review cycle)

Dilution awareness: Every refresh dilutes existing shareholders. Model pool usage quarterly. Replenish option pool before it drops below 10–12% of fully diluted shares.

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Total Comp Modeling

Components of Total Comp

Total Compensation = Base Salary
                   + Annual Bonus (target %)
                   + Equity Value (annualized grant / vesting period)
                   + Benefits (employer-paid premiums, retirement match)
                   + Allowances (home office, internet, L&D, commuter)

Annualizing Equity Value

For comparison to cash compensation:

Annual equity value = (Grant shares × Current 409A price) / Vesting years

Example: 10,000 options at $2 strike, current 409A = $8, 4-year vest

• Grant value at current 409A = 10,000 × $8 = $80,000
• Annual value = $80,000 / 4 = $20,000/year
• If base is $150K, total comp is ~$170K/year

Note: For recruiting purposes, you can use last preferred share price (VC price) to show upside — but be transparent about the difference between 409A and preferred.

Benefits Valuation

Frequently undervalued in offers. Quantify explicitly:

Benefit	Typical employer cost
Health insurance (employee)	$4K–8K/year
Health insurance (family)	$15K–25K/year
401K match (4% of salary)	$5K–10K/year
L&D budget ($2K/year)	$2K/year
Home office stipend ($500)	$500/year

A $140K offer with family health coverage + 4% 401K match is worth $165K+ total.

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Raise and Refresh Process

Annual Compensation Review Cycle

Recommended cadence:

• October/November: Market data refresh, band updates
• November/December: Manager merit recommendations
• December/January: Calibration and approvals
• January/February: Effective date for new salaries + equity grants

Budget allocation:

• Merit budget (performance-based raises): 3–5% of total payroll typically
• Market adjustment budget (fixing below-band salaries): Separate from merit. Non-negotiable to avoid attrition.
• Promotion budget: Separate. Promotions should not come from merit pool.

Merit Increase Guidelines

Performance Rating	Merit Increase Range
5 – Exceptional	8–15%
4 – Exceeds	5–8%
3 – Meets	2–4%
2 – Needs improvement	0–1%
1 – Underperforming	0% (PIP active)

Adjust based on compa-ratio. A high performer at P90 of their band gets a smaller increase than a high performer at P50.

Compa-Ratio Adjustment Matrix

Performance \ Compa-Ratio	< 0.90	0.90–1.00	1.00–1.10	> 1.10
Exceptional (5)	12–15%	8–12%	5–8%	3–5%
Exceeds (4)	8–12%	5–8%	3–5%	1–3%
Meets (3)	5–8%	3–5%	2–3%	0–2%
Needs impr (2)	0–2%	0–1%	0%	0%

Promotion vs. Merit — Keep These Separate

Common mistake: Using merit budget to fund promotions. This forces a choice between rewarding performance and recognizing level change.

Promotion increase guidelines:

• One level (e.g., L2 → L3): 10–20% increase, new equity grant
• Two levels (rare): 20–35% increase, new equity grant at new level
• Manager track (IC → M1): 15–25% increase, new equity grant

Promotion criteria process:

1. Manager nominates with written business case
2. Calibration committee reviews cross-functionally
3. HR validates against band (no off-band exceptions without CHRO sign-off)
4. Employee informed before annual review — never surprised at review meeting

Off-Cycle Adjustments

When to do them:

• Counter-offer situations (see below)
• Competitive intelligence reveals underpay for a specific role
• New market data shows a role significantly under-benchmarked
• Internal equity audit reveals unexplained gaps

Counter-offer policy: Three options:

1. Match — Risk: signals you underpay; sets precedent
2. Partial match — "We can do X, which is the top of your band" — cleaner
3. Decline — Accept the attrition, improve the band for the next hire

Rule: If you're regularly in counter-offer conversations, your bands are stale. Fix the bands.

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Pay Equity Audit

Run annually. Non-negotiable at Series B+.

What to audit:

• Pay gap by gender within each level and function
• Pay gap by ethnicity within each level and function
• Compa-ratio distribution across demographics
• Time-to-promotion by demographic group

Methodology:

1. Pull all employee data: level, function, salary, tenure, performance ratings, gender, ethnicity
2. Run regression controlling for level, tenure, and performance
3. Unexplained gap after controls = the problem to fix
4. Flag and remediate within the same review cycle

Legal exposure: In many jurisdictions, documented pay gaps without remediation plans are litigation risk. The audit creates a record of intent; remediation closes the risk.

Remediation budget: Set aside 0.5–1% of payroll annually for equity adjustments. If you're doing it right, this shrinks over time.