Salary Transparency: Clarity or Chaos?

0:01The earlier you think about putting a compensation structure in place, the stronger and healthier your company is because you have consistency, not fairness, consistency. You need to own the philosophy that you believe will drive the kinds of outcomes that you want as a company. There is a top 10 % of your organization that isn't just the best performer, but they're critical. What I mean by critical is if they left tomorrow, something stops working. Ultimately, these laws are forcing companies to put the kind of infrastructure in place that a manager can use as the backstop. Sometimes, the back to the matter is we might agree to disagree.

0:39Starting in 2016, states started enacting laws requiring employers to post their pay ranges, and now at least 10 states require it, amounting to over a quarter of the U .S. labor force covered by salary transparency legislation. and with these recent landmark changes, many companies are playing catch up. So in this episode we'll explore how companies are reacting, misunderstandings that exist around these nascent laws, and how companies can best prepare themselves to not just survive, but thrive in this new environment. And today we're joined by Shannon Gilts, operating partner leading A16Z's People Practices team, and Brandon Cherry, partner on the same team.

1:20Let's get started. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details including a link to our investments, please see A16Z .com slash Disclosures.

1:52So pay transparency, I feel like this is a new -ish concept. Maybe 10 years ago, certainly 20 years ago, pay was not very transparent. And so you guys have both been working in this industry for a while. Tell me a little bit more about how you've seen that change, maybe that information asymmetry, especially in the last few years. You know, it's funny that you say that. I was just trying to think of what year pay transparency became a thing. I think in 2010, it's 13 years ago. It became more of a cultural thing, right? And it became very much a Silicon Valley thing too, that you should feel confident with what you pay each employee.

2:28And if somebody else finds out about it, you should be able to justify it. And historically, that was generally reserved for government jobs, teachers. You get a master's degree, you get this many more dollars. There was like real clarity, and it was structured around achieve this or do this or have this. You get more money. But in non -government, non -education industries, it was probably a widely known secret that people talked about their compensation. We're going to spring it to the front so that there's actually insight and rational thinking around how much you're paid and why, which was really powerful for employees.

3:03Yeah, it is powerful. I mean, it seems like a no -brainer that that should exist, that company should think critically about how their compensation is structured. But to your point, that's not always the case. But now it may be forcibly the case because there are new laws in some states not all where they are required when you post a job to have Transparent ranges and so let's talk about that What have you seen in terms of some of the legislation or the rules that are now in place that kind of force companies to think a little bit harder about this? I think it was 2016 was the first time the law came out that if you are interviewing a candidate they can ask for the pay range for the role, and you have to be able to within 24 hours share with the candidate with the pay ranges.

3:46And I remember when that happened, like we worked with a lot of our portfolio companies on thinking through, what is your pay structure? And then it's just been a slow and steady progression around compensation, you know, around equality of compensation. Brandon and I were talking about this yesterday. The interesting thing is, is there is this law of pay transparency. If you think about the best practices is on how to build a company. The earlier you think about putting a compensation structure in place, the stronger and healthier your company is because you have consistency, not fairness, consistency.

4:19My favorite. I love to differentiate there. Wait, maybe you can actually differentiate. What is the difference there that you see? People will say, I don't think it's fair that that person is making what they're making. Well, let's dive into what that role is, the scope, the impact, the influence, what is the role? That's what puts someone's being comped against. When somebody comes and says, my comp's not fair compared to that person, you should be able to come back and say, no, for each role, we are benchmarking against this data and we target the 50th percentile. That's consistency. That might mean this role makes $100 ,000 a year and this role makes $80 ,000 a year.

4:58But an employee comes talking about fairness. You don't get a lot of people saying, you know what, I don't want to merit increase. That's too much money to do what you're doing. Not many people will say that. And so what a company needs to have in place are those conditions for success that will enable them to react and respond to pay transparency. If you've got a comp philosophy that tells you how you look at the competitive market, how you position yourself against the competitive market, a leveling architecture that clarifies where a role sits in the career progression of any potential job, you can then lean on that to drive a consistent conversation with the backstop of that consistent infrastructure.

5:36And then it clarifies and sort of codifies how the company thinks about compensation relative to their employees as opposed to having this black box and big US way in which compensation is set. It's a trust. It is. It limits cross -employed competition. I'm going to advocate for myself as opposed to in relation to that person. I'm just going to advocate for myself against what I know, the career progression will look like here. It's interesting because it's the outcome is actually driving for core infrastructure and your compensation strategy. The outcome is incredibly beneficial to companies.

6:10It's just painful to be able to articulate it if you don't have those things in place. Which many companies I assumed did not in 2016 when some of these changes started happening. And I want to get into how you actually developed that compensation philosophy, the strategy. But before we get there, companies are now having to react to some of these changes in law. And I'm just so curious to hear what you're seeing in terms of the reactions are they abiding, are they struggling to catch up, are they kind of circumventing the system in different ways? How are you seeing companies react because it does sound like many were not quite in that place when these things started rolling out?

6:47Yeah, so I would say a couple things. I would say one, we've probably never had so many requests for compensation, councils, consultants, and how do I? Right? So one, I think people are reacting the right way. They just want to get their arms around it. Yeah. And then I would say there's multiple ways that people are reacting. One, some are just saying we're going to be in a wait and see. We're going to see how enforceable these laws are, how much audits are taking place, what becomes of this new law? There's companies that are saying we're not going to do it. So we're not going to post our jobs because that's the most visible thing that's come out of it is you have to have a salary range Posted with your jobs.

7:26Yeah, and then the third piece is you have companies that are saying you could make between you know This role pays $65 ,000 a year up to 2 .5 million dollars a year right and somewhere in there We're going to pay someone and so I would say those are probably the three things that we see companies doing Absolutely those are three choices companies have and there's new ones to it and some states there's not laws, you know, there's minimum thresholds and things that people can explore around. What the requirements are in different locations, but you know, I think there's just a lot of concern over making sure that not only do they understand how to comply from a regulatory standpoint, but also what does this do to our employee population?

8:02Who's going to see this? How is this going to work? And if we do have 60 ,000 to 2 .5 million dollars, are we prepared? And do we have the ability to say, no, for you, it's 60, for other people, it's 2 .5 million. How do you have that conversation? And so I think companies are navigating through all of that. And so I would say that those are the three choices, but for every company, it's going to be very specific to where they're located, the kinds of employee populations they have, how clear and how strong their infrastructure is, and how they feel like they're prepared to have those conversations.

8:33Yeah, and again, because back to the basics, right? If you have the structure, so for us, it was relatively straightforward. We have the structure here. Yeah. And so we could post roles and, you know, put a salary range out there. We set it up so we can defend it. The interesting thing that happens though is again the number of times that somebody sees a job posted and thinks well that's what I do but I don't make that. Yeah. And so like it does like you have to be ready to have those conversations and get your managers ready to have a conversation on why actually this is a level above you and you can progress into it.

9:09Yeah. But that's not where you're at right now. And that's a hard conversation. I was going to get into the hard conversations, but let's just talk about that now. Like, A, have you started to see that as you started to post roles? And you're like, yep, both of you are sitting at home. And it helps us iterate on our process. Right? No process is ever great. And so I feel like weekly, we're like, okay, are we checking this? Are we doing this? And we're iterating on it. Because your future hire is super important. But they're not actually going to be contributing to productivity and output for six to nine months in most situations.

9:43So you have to be able to defend it to your current employees. That's the biggest thing that people are missing is yes, there is this law that you're supposed to post a range, but your biggest asset is your current employee population. And isn't it true also that it's not just that current employees can see the new jobs, but they can also ask. And so what is the rule around that that I, Steph Smith, can go and say, hey, I do this job. And what specifically can I ask for? You can ask for your pay range. And that's where your manager should be able to come back to you and say, here's the pay range.

10:13Here's where you're slotted. This is where you came in. Here's how long you've been in this role. We're seeing the progression. Here's how we think about compensation. Right? You would walk away thinking, they've been super thoughtful in how I paid. All right, let's start to think about how companies actually build this because a lot of companies and these don't have this in place or just in the early innings. And so if you are a company that let's say has, I think the California threshold is 15 employees, and all 15 of those employees have been hired in disparate ways, paid in disparate ways.

10:45There's no sort of underlying strategy or structure. Like how do you even go about thinking about how to start setting that up? Yeah, you know, they think the three core tenants are what we've talked about before. You need to be able to articulate your philosophy on compensation. Not everybody's going to be able to compete with a $10 billion in revenue publicly traded company on a cash basis, so you need to own the philosophy that you believe will drive the kinds of outcomes that you want as a company. So your compensation philosophy in terms of how you define your competitive market, companies of your size and scale, and where you position against that competitive market data is really important.

11:20That sets the tone for then how you think about driving market data through your comp philosophy to determine those ranges. The other element is your leveling architecture, how you define what it means to be an early career employee versus a seasoned individual contributor versus a first -time manager versus a seasoned leader. That's your leveling architecture. So between your philosophy and your leveling architecture and the third -party market data that you use to determine that relationship, you can set your ranges very consistent with what you should be providing to candidates and articulating to current employees when they request.

11:53By the way, on ranges, is there a right answer around how big a range should be because it does seem wrong, right? That a role could be 60K up through a couple million. That feels off. But what is a realistic range? And how do you think about what a range is appropriate? Well, I think first of all, just to stay, like it depends on the state, sometimes county and city. So the right range is going to be somewhat indicated by the law. Yeah, because every level has a range. And every role, like market data dictates what your range is really look like. Okay, it's not like you're gonna see like a hundred K difference in every range.

12:30Like some ranges are compressed, some ranges are larger. And some of it is because if you think about the senior leadership, you're not promoting, your ranges are gonna be big because you're going to continue to go through that range. And so it also, you see it change depending on level, role, market data, all of that stuff. The basic common construct is that earlier career roles have a narrow range because people are progressing into those roles more quickly. So think of it as an inverted triangle in terms of the width of the range around a target market position. And that's kind of an easy rubric, but it's going to change for every role.

13:04To share this point, more senior you are, the likelihood that you'll stay in that role longer is greater. And so you'll need more flexibility as a company to ensure that people aren't progressing beyond the range. And that becomes a problem from a communication perspective. But it's going to change for every role and every function because a manager of, say, finance isn't necessarily going to get paid the same as a manager of engineering. And so the absolute dollars will be different, but the structure may be very similar. And that's where the market did it. That's where the market did it. You know, the thing that's interesting about the pay transparency, pay transparency laws are only focused on base salary.

13:37That's right. Yeah, which is actually so funny, and it kind of goes back to, you know, when this first came out, a lot of folks response was like, this feels very government, right? Because that's how they're mostly paid. That's where they pay. So it's funny because you would think you would see more companies having these smaller ranges, knowing that they have cash compensation that still are bonus, potentially, that you can move around. You have equity if you're in the tech industry. There's all these different other levers that actually don't come into play. What are somebody's pay within an organization?

14:13It's kind of a loophole. It's just not completely thought out yet. And then to answer the other question, there's great tools. So if this had been rolled out 10 years ago, you would be relying on what Brandon used to do as a compensation consultant coming in building it for you tons of legwork, you know, and we even have a company pave who you can go in and you can work with them and their tool and you can build out your levels. Yeah, right? And so it's much easier to do so and so there's a part of me that's like if it's easier to do and you can do it and it actually builds a better trust environment, like why not go far?

14:54Right, exactly. I think one thing that many companies would be, maybe scared of is developing this system. And then again, as we talked about, it impacts employees who are already there, not just new employees. Should there ever be exceptions? I feel like this is something that comes up as different managers are talking about, top talent, you hear about the 10X engineer. Can a compensation philosophy that's because this is well -known? My fairness versus consistency. Can you build that in where the star players, the Michael Jordan equivalent in a business, can they really fit into something so structured like that?

15:33They can. And the nuance that you're going to have is that, and this goes back to like, I'll bring in another topic. When I talk to portfolio companies about performance management. Right. The thing I always talk about and it comes back to compensation. A lot of times, especially around equity, which is, There is a top 10 % of your organization that isn't just the best performer, but they're critical. And what I mean by critical is if they left tomorrow, something stops working. Single point of failure. Single point of failure. Those ranges, like they might not fit into a range, but pay transparency says why?

16:06Why is this a one off, right? And you can justify it. And so this is where I always go back to the fairness versus consistency. Consistency is consistency. If you define critical talent as being above range, that's being consistent. Like you have to be classified as that type of individual. And this happens in companies all the time that like their software architect, they're designer, they're a person that is like doing something that's so incredibly critical, that everything stops. And so as long as you're working it into your overall philosophy, it's still consistent. And is that about saying these critical people or just above range, or is it actually developing a separate track?

16:49You use the hand like a philosophy around how you're going to handle your absolute top talent. You know, a lot of times we'll talk about the building the range is it's not done in a vacuum. Shannon's brought up an incredibly important point. The consistency is really about the design and the process that you use to determine where you sit. The flexibility comes in other tools that the HR ecosystem should have in place, things like performance management, assessment of talent, assessment of candidates. Those are the things that give you the flexibility and the freedom to say, this person is a single point of failure, the opportunity cost of losing this person and their criticality to this company commands that we have to make sure that we put them in a position to retain them.

17:27And so the consistency in the application of the data and the design of the compensation infrastructure is incredibly important. The application is where you need to be able to recognize the flexibility that's necessary to grow and run a business. So once you've designed something and let's say you do have an existing organization, you're not starting from scratch. What do you do there? Do you level people who are already in the organization? So there's two things to do. We always try and get companies to do it before they're like 50 employees. Yeah. And this has actually helped us, right? Yeah.

17:57You're transparing, you mean much easier. And we've always said to people, the bigger your organization, the harder this project is. Yeah. So the first thing you do is you have to remove all the humans from the project. What do you mean by that? Like the names, the actual human beings, and you build the infrastructure of how many levels are we gonna have, what scope, and what is it typically? It's years of experience, it's scope, it's impact, it's influence, it's creative and operate. Like these are all the different pieces that you put into a leveling criteria. Okay. And then from there, you build out different levels, you then pull in your market data, right?

18:36you identify who appears, what's our market data, then you go through the process. Once you have all of that structure, you start leveling people just off of the leveling criteria. And you always find folks that are either way above range or way below range. And then you can dive into those as like almost a talent review. Like one, you're typically not going to take people's compensation away from them. So you might have a conversation with someone and saying, hey, you know what, Brandon, you're awesome at what you do. We just went through this leveling criteria. You're about 40 ,000 above where you should be.

19:11You're super valuable. I just need you to know you're not going to see an increase for quite some time unless you progress to the next level. Or if you continue doing what you're doing, I need the world to catch up to your comp. That's right. Or if you have someone who's well below saying, what's our affordability? And can we actually bring people to the minimum of the range that they should be at? So, those are required to do that. You're not required to do it, but it makes it easier to stand behind. Yes. And that's why I say it's affordability. Because not every company can afford to do that.

19:43To your point, especially if you're a larger company, there can be a lot of money required, a lot of capital required to level up. But if you find that 80 % of your organization is not fitting into your leveling criteria, you're probably not doing your leveling criteria correctly. That's right. So, you're probably going to have a handful of one -offs that you need to go and address, not like 40 % or even 20 % of your organization being wonky to your criteria. That's actually a great point. So you're saying basically if people, if companies go through this exercise and they're actually seeing that 50 % are not following this criteria, there's massive gaps across the company that they should revisit it.

20:19When you look at the basics of leveling, you know, software engineers levels, I think there's typically six or seven individual contributors, right? Five to six individual contributors. What it might mean is that you pulled the levels and the data, and you built out four levels. And so you grab the data and went one, two, three, four. Maybe the way that you've actually structured and hired is you have a level one, which is like entry level. And then you don't hire that level two. You hire levels three. And so you might go back and just have to play with, we're not going to use all six levels. And that's where it's validating the type of talent you're hiring.

20:54It's so important to remove people from the conversation because it drives an org design or development conversation as opposed to, let's build a role around this person that holds a little bit of finance, a little bit of HR, and maybe touches on legal occasionally. That's not a scalable role. That's a Frankenstein role. And what you really want to do is you want to make sure that you're building the roles and defining the levels in a way that's consistent with how you are going to scale as a company. And to Shannon's point, then you can start to break your four levels into five if you think that's appropriate.

21:23Or in the seven level structure, you'd only have a couple of roles at the early stage and a bunch of roles at the top individual contributor technical talent because you've got a strong leader already in place that sort of fills those gaps. Yeah. And so that concept of putting market data against the leveling and having a clear conversation with your leaders is really important to be agnostic of the people in the roles because you don't want to design roles and levels around existing employees. You want to design about what's going to enable the company to scale and grow at the pace that is necessary.

21:52Right. And real quick, just because you mentioned it, there are freaking Stein roles out there. especially early a person where people are doing a little bit of everything. And what do you do with that if people are in those roles? So, company starts that way. And then as a company progresses, you actually do need people. So, as you grow as an organization, like, people have to become very specialized in what they do. And this is why using executives as an example is the easiest one, because when you're a small company, you might have a VP of product and a VP of HR. As you grow to be like a 5 ,000 person company, you're probably going to have a chief product officer.

22:32You might have a CHRO. Then you know, you can have VP's, SVPs, EVPs. It really goes with the scale and the type of people you need to hire. And so you start seeing the layering taking place. That makes sense. Yeah. So if you are rolling this out to the company, one, how transparent should you be as in how much information are you revealing to each individual, but also to the company, kind of revealing how you're thinking about this or even the fact that you're pursuing a really robust structure. And then also some of those difficult conversations, what do you do when someone is just really unhappy with where they fall in that new structure where they come and they say, there's no way I'm at the bottom of this range.

23:15You know, like I'm sure you get that a lot too, where people have a different perception around their value, maybe even the scope of their role in what they add to a company. Yeah, I mean, I think from my perspective, the success of rolling this out is not about, you have to look at all your stakeholders, obviously, your candidates, your employees. It's really about the success of how you enable your managers and HRBPs if you've got them to have these conversations. From a required transparency, you're going to have to provide a range and you should always have a really clear understanding of who's going to see what.