a16z Podcast - a16z Podcast: Compensation Isn’t About Paying the Most, It’s About Being Consistent

Episode Date: August 7, 2015

The key to any great company is the people. Of course, part of attracting and keeping the best people is compensation. It seems straightforward, but if you don’t develop a philosophy early around how you are going to compensate all those great employees you’re going to be in a world of hurt later, says Shannon Schiltz, who heads up a16z’s People Practice. Compensation, from salary to different forms of equity, is the topic of this segment of the a16z Podcast. For the founders of many fast-growing companies it’s often an afterthought, says the other compensation expert on the pod, Than Nguyen. Founders are busy enough just finding enough people to build and grow their startup. But as a founder you need to raise your head up and consider how compensation fits into your long-term plans. Nguyen and Shiltz discuss ways to make that happen.

Welcome to the A16Z podcast. I'm Michael Copeland. The key to any great company is the people. But if you don't put some real thought into hiring, if you don't develop a philosophy early around how you are going to compensate your employees, you're going to be in a world of hurt later, says Shannon Schultz, who heads up A16Z's people practice. You don't build a product without having a product roadmap. Right. And so if you're going to build a company, you've got to have a like a roadmap on how you're, you don't build a product. You're going to build a company. You've got to have a like a roadmap on how you don't. You don't build a product. You don't. You don't. You don't you're going to attract the best talent and how you're going to retain the best talent. Compensation from salary to different forms of equity is the topic of this segment of the A16Z podcast. For the founders of many fast-growing companies, it's a bit of an afterthought. Says the other expert on the pod, Tan Nguyen. When you're at this kind of high-velocity hiring rate, I think people forget about what's my

strategy and what direction am I pointing at because they're solving for very short-term needs of that initial recruitment process. And that candidate's saying, well, I've got so-and-so willing to pay me XYZ. And you're in that trench. You're trying to fight to win that. And then you look down the road, you're 100 people, 80 people, and you really don't have a core essence of how you've paid your people. Today we are talking about compensation. And to help us do that, we have Shannon Schultz, who heads up our people practices here at the firm. Shannon, welcome. Thank you. And Tan Nguyen, who is another compensation expert, Tan, welcome. Thank you. Okay, compensation. In this job market where people are fighting to hire people, I thought you compensate people by paying them well,

market rate, if not better. You hand out options. If you're a founder of a company, that's what you do. and you're off and running, what's wrong with that approach? I think if you take a step back and think about compensation in general, you know, it's a hot topic. A lot of people talk about it. So many people are focusing on the short-term problem, which actually is your long-term strategy, but it's hiring people. How do I compensate them? How do I pull them from big companies? How do I pull them from their comp packages that they currently have and make them a part of this team? But when you're thinking about that. You have to think short term and long term. Okay. So paint a picture for us when you have people come in and talk to you or you go in and talk to them because they're not quite doing it right.

I've started a company in that first phase, what am I facing down and what am I typically not doing correctly? So I don't know if it's not doing correctly. Or thinking about, maybe. And I would say that's exactly it. It's what am I not thinking about. And so if you think about, and you know, I feel really fortunate in that I get to see seed founders. I get to see folks who are AAB round, and then I also get to work with growth companies. And so if you look at the picture, folks are, they start the process by, I need market data to hire these three people that are actually going to build the first version of the product.

And that's a very simple process. You look at market data, and from a cash perspective, you have your, every founder, has their philosophy around the cash perspective. Because cash is usually tight. Where they're not thinking as much long term is the equity piece, the upside. You know, you join my company now. You're taking a lot of risk. You're not going to have a lot of cash. What am I doing with regards to equity? And so I would say, you know, at that stage, you probably don't have to have a compensation philosophy. But then as you start scaling as an organization, that's when you really have to think about how am I going to hire people, how am I going to be consistent with my equity,

and how am I going to retain these people, given that I have the least amount of footage on each person that I'm bringing on board and giving equity to on how they're actually going to perform inside my company. By footage, you mean like we are a football team and I'm looking at the game footage? Correct. I got you. Okay. Tom. And I think to add to that, once you are in this kind of growth, hiring phase, you're asked to hire a lot of different talent, you know, and that diversity means there's diversity in pay, there's diversity in assessment, there's diversity in seniority, contribution level, and when you're at this kind of high-velocity hiring rate, I think people forget about what's my strategy and what direction am I.

pointing at because they're solving for very short-term needs of that recruitment, initial recruitment process. And that candidate's saying, well, I've got so-and-so willing to pay me X, Y, Z. And you're in that trench. You're trying to fight to win that. And then you look down the road, you're 100 people, 80 people, and you really don't have a core essence of how you've paid your people. So again, to be... To be a little bit specific, then, in that first phase, it really is, okay, how much

much am I going to pay these people, you know, to lure them in? So this first handful, equity is sort of part of the package, obviously. But that's a simpler calculus, I guess, with fewer people. Then the philosophy kicks in when you, like you say, Ton, hit whatever, 30, 40, 60 people. I actually, so I've been, we've been recommending for companies that they really start thinking about the types of folks and the types of comp packages they're going to be giving people when they're start as soon as they're going to hit high growth so when you have a handful of people that you're hiring it's very easy to stay on top of it um you know i had a conversation with a company yesterday and i realized um they kept referring to all we want everyone to be equal and i said

it's not about being equal it's about being consistent right so knowing what type of people you're hiring what the criticality of those roles are for the type of people you're hiring and differentiating on your compensation model for the criticality to the organization and how much they're going to contribute to the organization. Well, so let's talk about the different philosophies that are out there. And then what are the signals that may be, like you say, if you aren't consistent, this will happen on the other end. But let's talk about philosophies first. Well, I think philosophies, I mean, that's a big and broad term. And it scares some folks when you talk about that, especially companies are in kind of that earlier stage and they're growing, because we don't

want it to be onerous. The philosophy, in my mind, philosophy is about the direction or the intent from which you're going to grow. And philosophy actually helps you kind of fundamentally put some quantitative data behind what you're doing, right? So when we talk about philosophy, the first line is really around pay positioning within the vehicles of pay that we typically see, and that is cash, that's cash plus bonus, I mean salary plus bonus, and then typically equity in the form of what we see. I mean, right now we're not really talking about benefits, the other perks, but those are really the core components that we're always addressing. But establishing or even understanding your market positioning to what you're defined competitive, you know,

group is or your proxy that you compare against helps you ground from a numbers perspective how you're going to measure where you're at. Not doing so will really confuse kind of how you think about compensation. So you have to take a broader picture about, you know, the size of company you're at, the type of business, kind of the product market fit, your evolution, how quickly have you gotten to revenue, et cetera, and really be thoughtful about that as you compare to a data set that makes you comfortable from which you can start to develop some communications and actually a point of reference to your employee base that says, hey, we've been thoughtful about this. We understand where we're at right now. Here's where we're going and here are

the companies we want to be like. And this is what they're paying. We're going to step function into that right and we're not going to be disingenuous in saying we're going to be there right so that level of understanding needs to be in place and you can't get to that level understanding unless you have some good data behind you so that data comes from comparing yourself to the competition from your own internal obviously checks and balances and what you have already yeah and there's all obviously other you know published surveys or there's you know with with our firm we sample all of our clients and we have the detail and data behind that. So a lot of our clients that come to us and a lot of A16 companies come to us, we're

helping them try to position where they are in the marketplace and helping them establish that just baseline framework. Sometimes it's a lot more complex. It depends on, you know, obviously the maturity of the organization and the understanding of the leadership. But, you know, at a baseline, we definitely need to extract what that. that market level is. Companies all have reputations.

I'm just wondering, you know, when I'm a young company, you want to be competitive with all your competitors. Can this make you more competitive? And if so, how so? We talk to, you know, I get to work with the companies on the recruiting side as well as on compensation and everything HR-related. One of the things that we always share with our entrepreneurs is it's really, really important that you can have a conversation about how you are building out and being consistent

across the organization from a compensation perspective. People join your company wanting to know that if they perform and they do a great job, that they will be rewarded for it. So if you actually, and, you know, if you put in place a philosophy, you can actually speak to rewarding your top performers. And that's something that's a huge selling point in the recruiting process now. people want to know that that's going to happen for them. One of the things I wanted to comment on really quick, when you were talking about philosophy,

we also come across people really confusing philosophy and process, right? So when you start talking to a company about you should really think about your compensation philosophy, a lot of times they're thinking this is going to be a process they have to put in place. And it's confusing the two. And the philosophy is what actually helps you with consistency across the organization. types of philosophies are look we want it to be equal we want to be consistent we want to be the best or the highest paid in the marketplace we want to i don't know attract the cheapest people well that's that's general philosophy i think you know part of the philosophy if you start to break that down it's it is really hey from a cash perspective this is objectively where we're at in the business we we want to kind of goal for being in the market median of this data set in terms of data

of cash, say. And, you know, maybe within this engineering function or product function, we actually have to go higher on our philosophy and pay at the 75th or the 80th within different pay components. And by identifying or actually putting a flag post that says we're going to pay there, what you're doing is developing a communication string with your employees that says, guys, here's how we're paying, and here's how we're looking at data. And the data set that we're looking at at the 75th percentile or the 85th percentile says a, let's just hypothetically, a, you know, senior engineer with approximately said years of experience is going to make around this at the upper

quartile of this pay ban. Right. Right. So, you know, you're not just saying that. You're actually taking some tangible data. Now, you know, everybody's going to have their own opinions on where the data comes from but that's the stance you have a platform from which you're using and that's going to evolve right the other thing that um it allows you to do is it allows you i keep going back to the word consistency because everyone it's so transparent like everyone's very transparent um you know back when i was running hr at opswear i don't think our employees talked a lot to each other about what they were making um and so yeah it's different it's different now every a lot of people talk about what they're making.

Open source comp, as I say. Everybody knows everybody's. Right. And so, but the thing is, is if you have a strategy and a belief on what you're paying for different roles, different people in the organization, you can stand behind that when somebody comes and asks you a question. Right. Right.

And I think that's really, really important because the one thing you don't want to do is you don't want your employees to feel in the recruiting process. had they negotiated better, they would have a better comp package. Got it. Right? You want them to feel that you're consistent. And if you've actually thought about compensation, when you're recruiting someone, you can say, point blank to them, this is what I'm paying. This is what the next person who comes in who's maybe even a better negotiator than you is going to make this too.

Right? I'm very consistent because I've looked at it. I've put thought into it and this is market for these roles. even if I'm not paying top in the market or in the top quartile or whatever I do feel like there's other things that companies can offer though right you know you're working on a tough problem you're working on something that will see the light of day you are working on something will help you know half of humanity I think it still has to boil down to that I mean compensation is compensation right there's I always say to people there's always going to be

somebody that's going to pay more yeah and there's always going to be somebody that's going to pay a lot more. But if you also look at attrition data, people don't leave a company because of comp. People leave a company for many other reasons. They'll use that they're going to make more at their next company, but it is usually there's a different, if you actually scratch at the surface, you will find out there's a different reason they're leaving. They have to feel that they're being paid fairly. That means they have to feel that they're being paid fairly in the market and against their peers. And this is where if you have a philosophy, you're answering both of those. And we're assuming that the compensation discussion is important in actually the

recruiting process. The compensation discussion is the last piece of it. Well, it should be the first piece and then at the closing the candidate, which means that they're interested in your company because of either other kick-ass engineers they're going to be working with, an incredible product that they like believe in or you know a market that is like going crazy like all of those things will actually dictate if you are going to be able to even get to a compensation discussion with someone right so that's where it's it's being consistent and being and doing it right when you get to an offer and lack of consistency what are some sure signs that you are lacking consistency well i i think that comes up pretty evident i mean after let's

just call it that honeymoon phase of a year. If people feel like there's inconsistencies and just what Shannon said, if we can't communicate in a transparent manner about how we pay people, it's clear. I see so many situations, clients that come to me, and they really have really pressing issues around turnover and around people not happy. And they cite that it's around compensation But you dig into it and they don't have very strong communication about their ability to really address success, really kind of be thoughtful about conversations. And you know, and you talk to the actual employee. It's like, well, I think I got a raw deal. I didn't negotiate early enough.

Right. And that's usually compared to colleague-wide. who, as you say, everybody knows what those people are making anyway, right? Or how they're compensating. Exactly. Well, okay, so let's shift gears to equity. We talked a little, you know,

we've talked about the salary part. How, you know, startups and technology in particular have this wonderful way of compensating people through stock. And yet, right now it's sort of fraught where people are trying to figure out the most equitable way to do equity. How do you guys approach it? And how should people start to think about it? So two things. One, it's really important to be able to differentiate when you're speaking equity on what makes your company special or what makes your company, you know, the place that somebody wants to go. But it's also, and that goes down to, it's not about, you usually can't compare equity packages. Like, you can't look across five different offers and say they're all the same offer compared to the amount of equity you're getting. If it's at a different stage, you might get a lower equity package, but it's,

It's same value. But the biggest piece for founders is to really be able to sell what the equity piece could be and why it's so important and what your contributions are going to be in order to make it a huge value. Right, because equity is sort of worth nothing at the beginning, right? And everybody hopes that it will be worth something. It's all assumptive. And I think, I mean, it's funny.

Long-term equity, in my opinion, I'll focus on long-term equity. And what I'm seeing in the marketplace is this really shift of long-term equity being shoved into kind of short-term incentive. And I don't think that's fair for that vehicle. Call me old school. All right, you're old school. I mean, we talk about the growth and the development of a company and what it takes to really drive that enterprise value. And it takes a lot of time. You're not going to turn over a company and take them public, typically in four years' time.

So I think that message, you know, again, with kind of the positioning and how people are thinking about, just the exuberance of the exits and the preferred values these days have really put a cloudy, I feel like it's put up cloudy kind of definition on. what people should be expecting. How do you advise founders to then talk about equity in their companies? Because again, most people, despite all the great stories that you hear where, you know, Facebook folks or whomever just, you know, made a boatload of money, most people don't from equity. Most employees don't, right? And so how do you have a sort of start off an

honest conversation as a founder about the value of your equity? And ideally, it is worth a lot at the end. But again, Shannon, you said you don't have footage on the people going in, but how do you create value? How do you sell that to these potential employees? Well, I think it's, you know, it's a piece of the compensation package that somebody's getting. And so regardless of how much they're actually getting, you could get one stock option or you could get, you know, a thousand stock options or 10,000 or 100,000 stock options. You're still selling the value of the company. And hence the value of the stock option the same way, which is today we're here. And our goal is to be, you know, way up here. Right. And so everything, like we're giving you a piece of the company

because we value what you're going to contribute. And here's the milestones we need to get through. And as you, as you contribute to those milestones, you'll see the value of the stock option increase. You know, and that's what equity is used for. To, you know, it's a, it's a, it's an extra kicker to your base, if you have a bonus, all the other perks you have. It's something that's on top of it if we actually realize the value of what we think the company is going to be. But, Tom, to your point, do you need to be explicit about this being a sort of a long-term, you know, play? Well, I think you have to be kind of really genuine and try to be as authentic as possible in terms of the growth and what it's going to take. It's clearly about execution.

But it's also, if you're able to message the fact that, hey, what we'll call the new hire grant or the mega grant is here to get you locked in. But the real value for us and the real value and the support that we're going to provide is as we increase our value and as we grow, you are going to be rewarded for that growth. Not only initially, but we've got to develop plans that make you want to stay here. Right. Right. And I think so many times we're not or entrepreneurs are not thinking about strategizing and building plans that allow them to lock in that employee six years down the road. They're just trying to say, I'm solving for that mega grant, that four year new hire grant. and let's see what we can do.

But you have to be thoughtful about that footage. If you're performing, we're going to reward, and we're going to reward frequently. And I think that is a clear message that gets people in the alignment. I think compensation is it has to influence people, you know, to a certain extent. And it has to support that direction that you're trying to influence them in. and, you know, just so many times we're just not being thoughtful about that, and we're just addressing very short-term or, you know, front-end issues. Are there types of equity grants and that sort of long-term retention approach that you're seeing out there that, you know,

it's not one-size-fits-all, but what are you seeing out there and how is it working for folks? Well, I don't even know that it's, it's not even, there's a whole bunch of different things that are going on in the market right now. You know, there's a ton, there's lots of companies that are moving to RSUs, restricted stock units. Okay, and how does that behave differently than straight up equity? Well, their present value shares versus options are appreciation. It's a contract. So you're actually, you know, you're gaining essentially that intrinsic. value. Right. And there's tax implications from one to the next? Yeah, exactly, for the employee

when it's granted. But I think it's regardless of what vehicle you're using, it's going back to planning to retain your employees. So as we were just saying, you put all of this work into the front end issue, which is identifying and finding the right talent. Depending on how well that person does, making sure that you are piling on stock afterwards. And that's part of a budgeting process. Right. How do you keep enough stock or options on the side so that as people start to perform, you can really pile on so that they don't think about moving on to do something different. And this is where I say, you know, we spend so much time thinking about, like,

what are we going to give people when we hire them, less time about how do we continue rewarding them? And there are many times you really don't know how well somebody's going to do for you in the company until you get there. and you could hire like the best architect who has built like three incredible products. You could hire them into your organization and they could just not gel with the rest of the type of people you're hiring and they just don't work out. And so if they decide, you know, if you decide to go separate ways or they decide to leave, there's usually a significant amount of options that's going with them. And so that's what I mean by you don't have good footage on how people are going to actually do in your, organization until they start working in your organization. So it sounds, again, like this is more about consistency as well.

I mean, equity is as well. My new favorite word. Consistency. Consistency. Say it with me. Do you have any, like, particular then thoughts on RSUs versus options? I mean, if RSUs are all the rage, you know, is there any reason to think about one versus another?

Well, I think, yeah, there was a lot of discussions. And I think part and parcel, it's due to the competition, right? I mean, there's always the notion of, look, I have to compete with Facebook, I have to peep with Google, and their equity is in RSUs. So how do I compete with that? And that's a struggle for, at any day, it's a struggle for any company competing with such a large enterprise with such value. And, you know, I think this kind of goes back to the broad.

state of there's a lot of private companies that are worth north of the billion dollars. You know, a billion dollars used to be like a significant public company, right? And these are private companies. So now you're, and generally speaking, RSUs certainly come about for a lot of reasons. A, you know, you've gotten to a level of real value that's been de-risk where it makes sense to move to that model. But with that said, you're also very close to an IPO or some kind of liquidation event, right?

But we're seeing that pushed back. And what's causing a lot of, I think, consternation for me as it and talking to Shannon a lot of times is, look, it's sometimes a seven to ten year run before you're looking in an IPO. And now you're forcing kind of a present value. equity form that has taxic implications on employees. And it's, you know, you're not seeing the exit event as in the near horizon, right? Whereas options, you know, it's still more flexible from an employee perspective, right? They can, you know, once it vests, they can either choose just

to exercise it or not, right? But also, it's also to the point of, there's still a lot of execution that needs to get accomplished. We're not there yet, right? And I think that's really important. That's one of the biggest messages that I have for all my startups that I work with. It's, you know, it's long-term equity. And the horizon is still far out. And there's still a lot of appreciation that you can arrive from an equity perspective.

And I don't know if this influences how people discuss where they're at and what they think in terms of how quickly they're going to see, you know, liquidation or not. But I kind of sense that there is this notion that there are issues, we should be able to, you know, liquidate them and get a piece of them sooner rather than later. And I just think that's just a mixed message because there's, We're paying such high premiums to get into the investments these days, and it goes back to our discussion a couple weeks ago that there's a level of execution that you have to live up to to get to that valuation.

Right. Right. And that communication doesn't necessarily set in with your employee base. What if the market changes? What changes, if anything, about what we've discussed, this idea of philosophy and and consistency, because I think the market will change, right, at some point, but then what doesn't change? And I want to ask that because I think that's the most important thing that people should walk away with, maybe. Regardless, if the market changes, you know, we might see, we might see

salaries come down. We might see, you know, things change a little bit. We might see people stay at the companies that they're at longer. But I don't know that it changes this discussion, because this discussion is really about, you know, building the company and building it right. And part of that is thinking about your compensation strategy. I do think, you know, if the market, you know, adjusts a little bit, we could see less discussion around, you know, the value of options. Yeah. And this happened, right? So if you look back in, you know, early 2000s, like nobody was really thinking, nobody was negotiating options for a while. No, it was like, I need to be pay cash. I don't really care about options.

Right. And then, you know, it started to, yeah, it started to creep up again. And then, you know, in the late, late 2008, 2009, those dates, like things started changing again. And once again, options were not like a big discussion. Right now, it's a big, it's a great market. And, you know, there's been huge successes and people are really excited about it and people want to have a piece of the company that they're building. Who knows? If things adjusts like options, might not become, you know, as much of the competitive offer. It goes back to cash again. Right. Who knows. But again, it sounds to me like, and to sum up a little bit, that the same approach applies. You know, you need to have this philosophy. You need to have the data to know which bands you're going to sit in and perform in

and kind of aspire to. You need to keep an eye on the long term for retention and understand that execution means kind of a long-term horizon view. and then I guess be willing to adjust as the market adjusts a little bit. And it's, you know, if you take a step back and you think about, you know, I'm not a very technical person, but you don't build a product without having a product roadmap. Right. Right. And so if you're going to build a company, you've got to have a like a roadmap on how

you're going to attract the best talent and how you're going to retain the best talent. And this is one of those tools that if you build a really good consistent roadmap that's going to have changes as you get, you know, customer feedback and you're going to get features that you add here and hopefully you never have to take any of the features away. But like, that's going to keep you going in an up market and a down market because your employees are going to know you've thought a lot about it and you're consistent about it. Word of the day, consistent. Shannon, thank you so much. Anton, thank you. Thank you. Thank you.