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Sep 13, 2023

The Case of the Exposed Compensation File

Episode Summary

Carl, a startup CEO, accidentally left a list of every employee's pay and equity in the printer. Soon enough, it was circulating on the company Slack. Heidi helps him understand that the most troubling thing exposed wasn't the payroll. It was the company's lack of a proper compensation philosophy.

Full Transcript

HEIDI: Welcome to The Startup Solution, and “The Case of the Exposed Compensation File.”

Hello. I'm Heidi Roizen from Threshold Ventures. The Startup Solution is a podcast where we unpack the “oh shit” moments faced by entrepreneurs and then find the best ways to get through those moments alive — and with a little luck, maybe even better off.

I was in a meeting when my phone started blowing up. Text, email, Slack, voicemail — every channel was heating up. No one else in the room could hear it, but I could feel my heart rate rise with every ping.

I snuck a glance at my screen and saw that all the messages were coming from the same person: the CEO and founder of an early-stage startup we had just invested in, and on whose board I now served.

While I wish I could say I thought this might be good news, history has taught me that urgent news is usually bad news, so, as soon as I could excuse myself from the meeting, I checked in.

AUTOMATED VOICE: “You have one new voicemail. First message.”CARL: Hey, Heidi. You said I should call you for anything, anytime, and uh, so here I am — maybe sooner than either of us expected. Um, I really screwed up, and I have no idea what to do now. Yesterday, the head of HR sent me a spreadsheet of everyone’s pay and equity for a meeting this morning. I printed it out — and then I forgot to go get it from the printer in the kitchen. Soooooo… I just saw the whole thing posted to our all-company Slack channel. I feel like throwing up, and I have no idea what to do. Call me. Please.

HEIDI: By the way, I’m a believer in the Entrepreneur Protection Program, so I’m going to refer to this CEO as “Carl” to protect his identity for the rest of this episode.

Carl may have been feeling like the Lone Ranger, but his mess-up was far from unique. One thing about my job is that, over time, I see similar problems — sometimes the exact same problem — happening over and over again. In the moment, it might feel like your life is over, but I’ve learned that most of them are survivable if you do the right thing. This particular disaster is one I’ve seen so often that I almost expect it to happen at every company I work with.

It’s a common saying that “information wants to be free,” and compensation data is particularly juicy. Right now, there’s no sense crying over the fact that it got out — Carl just needs some advice on how to move forward from here.

The lesson you might think you should take away from this snafu — this “oh shit” moment — is that Carl needs to shore up his communications systems so that comp files won’t leak again.

And, well, sure, it is better if your comp doesn’t get out in the wild. Lesson learned.

But that isn’t the biggest lesson here.

I always tell CEOs, “Just presume that information is going to get out. Presume that anything you say or do might end up on the front page of the New York Times. Imagine how you would feel about that. And then think: what can you do about it now, before it gets out, to change the outcome and minimize any potential damage?”

In the case of a leaked comp spreadsheet, the main worry Carl should have is what his compensation details communicate to his team about how he thinks about them, what he values as their leader, and whether or not he is treating them fairly across the board.

The leakage is a symptom. Compensation philosophy and practice are the actual issues to address.

Compensation sounds like it would be a super simple thing. People expect to be paid for their work. But there are all sorts of components that go into what makes for fair compensation. And I’m emphasizing the word “fair” because when something like this gets out in the open, the first thing people think about is, “Am I being treated fairly?”

Fairness is such a basic desire it extends even beyond humans.

There’s an experiment behavioral scientists did with monkeys. They gave the monkeys cucumbers, and the monkeys were happy. Then they gave one monkey, just one, a grape — and guess what happened: the other monkeys freaked out. The cucumber is no longer fair if someone else is enjoying a juicy grape, and even a monkey knows that.

Humans do, too. We want to know if the system we are in is fair. And if it doesn't seem fair, that impacts how we feel about that system.

If your company’s spreadsheet has got grapes and cucumbers all mixed up, you've got a problem. If you hired your cousin who wasn't really qualified, and your uncle pressured you to pay him 25% above market — buddy, you’re in trouble. If squeaky wheels get greased, how does that make your strong, loyal, quiet performers feel?

Remember how I said the problem with a shared secret comp document had nothing to do with secrecy? Well, it has little to do with money either, at least not in an absolute sense. People often choose to forego the highest pay they can get for other subjective benefits, like the mission of the company, flexible work structure, quality of the other employees, or even the location.

That said, employees do expect the overall internal compensation system should be fair on a relative basis. If it’s not, what does the data say about your company’s culture? What does it say about how people are valued and treated?

Granted, everybody thinks they should be more highly paid than they are — that’s just human nature. So, there’s going to be a certain amount of unhappiness when everyone is privy to what everyone else makes.

But in reality, people are paid differently within every company. Why they are paid differently is what is important, and that’s what we should be talking about.

For most tech companies, your most important assets walk out the door every single night — or nowadays, they don’t even come through the door, since they’re working remotely.

Compensation is a huge tool for attracting, retaining, and motivating people — which, in my mind, is one of the most important things a CEO does. And that’s why it deserves your attention.

Often, at early stages of a company’s life, CEOs kinda wing it without seeking input about how to pay people. They respond to each recruitment dance, creating a hodgepodge system with no underlying strategy or tests for fairness. This seems to work okay — well until it doesn’t. And when it doesn’t, it leaves people feeling like they were unfairly treated, which hurts them, and hurts your culture, and can lead to people leaving that you don’t want to lose.

So, what’s the right way to do it? First, set the major components that apply across the board. Consider things like:

Do I pay people at the top end of the range in my market? Do I pay people at the middle of the range, but give them heavier equity that doesn't have any value today but might in the future?

Do I pay people a little below market, but allow for a lot of flexibility they wouldn't have otherwise? Do I reward people for measured performance?

This general philosophy should be something you can articulate to anyone working for you — or even considering working for you. If well thought out, compensation philosophy can even be one of the reasons that people will choose to work for you over their other options.

In Carl’s case, he actually had a pretty flat compensation range. In fact, he had recently lost a few people to the competition because he was paying his software engineers way below market. He and I talked about the fact that he might be underperforming in hiring because he was not current on market data and that he should be more specific in how his company was going to consider the market data and incorporate it going forward.

I introduced Carl to an external comp specialist. They had market data and great templates for how other companies have determined their philosophies and put them into practice.

Carl was relieved that there was a path forward in formalizing his compensation strategy. He was also happy that his current situation wasn’t all that bad. After our discussion, he came to the conclusion that he could use this crisis as an opportunity to re-evaluate his comp practices to align with the culture that he wanted to create and ensure that their comp was both market-validated and fair.

CARL: Hey, Heidi, here’s what I’m thinking of saying at the all-hands tomorrow. What do you think? Hey, gang, as all of you know, the entire company comp schedule was posted to Slack yesterday. This is totally on me for having accidentally left it in the printer — um, and I do believe that compensation specifics should be kept confidential, and I will strive to keep it that way in the future. That said, compensation is a critical component of our company strategy, and while the specifics of each person may not be something that everyone should be privy to, the philosophy and rules we apply to how we set compensation should be something everyone understands. After all, how we pay people is part of how we treat people. My goal is for us to be market-competitive and also fair. And you have my commitment that I will strive to ensure our compensation reflects that. If anyone has any questions, feel free to talk to your manager or me about it. I’m taking this opportunity to review our current comp practices and do a better job of articulating and implementing compensation strategy, and you will be hearing more about that in the future. Again, my apologies for the incident happening. That’s totally on me.

HEIDI: So what happened? There were a few grumbles when the data first came out, some more legitimate than others — but no one quit. Carl worked with a consultant, his board, his managers, and current market data to create a compensation philosophy that could be easily communicated to all. And then worked with the same people to translate all that into specific packages for each type of employee the company had. Some people were even pleasantly surprised to find they were being adjusted up to reflect the market.

Carl felt that everyone appreciated the open conversation about compensation philosophy, including the commitment to making it both market-driven and fair. And Carl never even vomited, at least to my knowledge.

So, what should you take away from this case? For starters, “oh shit” moments are inevitable. You need to be prepared for them and not freak out when they happen.

Second, anything you do might get exposed to a broad audience, so it’s good practice to consider in advance: how will what you did, or are going to do, stand up to that scrutiny — and should you actually change what you’re doing in light of that?

And finally, in the specific case of compensation, it is a hugely impactful tool you have to attract, retain, and motivate people, and it should be something you proactively and intelligently design, as well as frequently revisit — at least annually, if not more often. So, if you haven’t already done that, today might be a good day to start.

. . .

And that concludes “The Case of the Exposed Compensation File.” For the record, these situations are real, but Carl is a composite. And no startups were exposed or harmed in the making of this podcast.

We hope you've enjoyed this episode, and if you did, please leave a rating or review it in your favorite podcast app. I’m Heidi Roizen.

Further Reading

Here is Threshold’s comp survey results from 2022

Here is a great explainer about stock options from Carta to help people think about their total compensation.

Pave is an excellent source of information about compensation trends.

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