This compensation model takes upfront heavy-lifting, research, and buy-in. It’s not a quick fix but it is a long term fix!
With this in mind, this compensation model answers two common questions for growing teams:
To answer these questions, invest in building a Career Framework with a system of Levels and Steps to make sure teammates have the opportunity to grow in clear and incremental ways. Then, your Career Framework gives you one of the variables of the compensation formula: Role Salary [Level, Step].
End result: Compensation Formula
Role Salary [Level, Step] X Cost of Living Multiplier = Base Salary
The end result is a Compensation Formula that can adjust for factors like experience and location but isn't a headache to calculate every time you make an offer. It is data-informed and moving towards being more objective (it's hard to fully remote bias). It gives you a data source and structure to your salaries to reduce bias and hold you accountable to paying people fairly.
An explicit Career Framework serves your team in two ways:
By creating a Career Framework matrix with a system of progressing Levels and Steps for each role at your company, you give team members an explicit way to grow and develop and you create the first variable in your compensation formula. Here is an example of a Career Framework matrix template:
Levels (defined by role): Levels are larger growth steps, defined by increasing experience in the role and company (examples are: knowledge, communication, role complexity, scope of work, etc).
Steps (defined by company): Steps are smaller growth steps, defined by behaviors your company encourages and values as important for progression (i.e. ownership, initiative, impact, etc.).
In this template, there are 5 levels for Individual Contributor roles: Entry, Intermediate, Advanced, Highly Skilled, and Career. There are three Levels for People Managers: Lead, Manager, Director.
In this approach, you are valuing dedicated Individual Contributors as much as People Manager roles. You're showing your team that becoming a People Manager isn’t the only way to progress.
You can have a different number of Levels or Steps than this example above. When rolling out for the first time, there is a balance of simplicity for adoption. You'll know better what might make sense for your team (i.e. more steps to allow for more smaller increments of growth).
This is where you put your Company Roles and Career Framework matrix together, it’s where the magic happens!
Using your Career Framework matrix, define benchmark responsibilities and what performance looks like based on Knowledge, Role Complexity, and Scope of Work at each Level for every role on your team. Here is an example of a Growth Marketer for a team I’ve worked with that has 5 Levels of growth:
Growth Marketer Benchmark + Levels
Steps are housed within each Level and are meant to mark smaller milestones of growth. In this example, we’ve chosen to define them by Ownership and Impact because these are behaviors the team wanted to encourage and build on. Customize these for your team and culture.
Once you have each Level defined for your roles, use a compensation data software (i.e. Payscale, Radford, Option Impact) to pull compensation data for each Level and Step in a higher cost of living city (i.e. New York or San Francisco). In the next step, we’ll adjust for cost of living.
Here is a good example of what Role Salary charts look like in action: Buffer Salary Spreadsheet
Building the model is the easy part! It’s important to bring your team along as you build this out as the final step is making sure every team member knows what Level + Step they are at for their role. Happy to talk more about what rolling this out looks like!
Note: This gets easier once working with formulas in the Spreadsheet. But, I want to walk you through the process and have a place you can refer back to.
Start by understanding the difference in cost of living in the team member’s city compared to your base market rate city. Using Numbeo, calculate the Adjusted Cost of Living + Rent Index that places the city into a Cost of Living Band which then dictates the Cost of Living Multiplier for the compensation formula.
Adjusted Cost of Living + Rent Index
This compares the cost of living + rent index between two cities. By starting with a base of $1,000 in your base market rate city, look up how much money you would need to have the same standard of living as the city you’re comparing.
For example: In NYC you would need $1,539.60 to have the same standard of living with $1,000 in Portland. Divide $1,539.60 by $1,000 to get 0.65. This falls into the “Average” Cost of Living Band.
Cost of Living Bands
By finding the adjusted cost of living + rent index, each city falls into one of the following bands:
The ranges for these bands are adjustable and worth having a conversation with your team to understand your compensation philosophy.
The Cost of Living Multipliers
Once we know what Cost of Living Band a city falls in, we can use the Cost of Living Multiplier to reach our final base salary. This is how you make the adjustment for Cost of living.
Again, this starts to really come together once you run through a few examples. Try out some examples in the Compensation Model Spreadsheet →
Continuing to Improve on Pay: Our Latest Changes to the Salary Formula and How Much it Costs: the compensation formula above is heavily inspired by the work Buffer has been doing in this area for years. They have really helpful resources and you can see their real salary spreadsheet to understand what this looks like for a team ~90.
Remote Employees Shouldn’t Be Paid Less Based on Geography: this is a counterpoint to the formula above. Help Scout believes you should not adjust compensation based on cost of living.
A career progression framework which works for everyone: how we fixed career progression at CharlieHR: this post is a great step-by-step guide for building a career progression framework and then connecting it to salary.
How We’ve Connected Salary to Both Personal and Company Growth: this post walks through the exact compensation model above. I partnered with Tuff to build out a career framework matrix custom for their business structure.