Do startups and small companies need a formal compensation benchmarking exercise?

Last year, the CEO of a small IT company asked my firm to undertake a compensation benchmarking exercise to identify compensation of similar manpower in comparable businesses. They wanted benchmarks for the software developers, design guys, and other operations team members in the business. They wanted adequate data to be able to make informed decision at their end, to be able to placate their employees, who probably thought that they were underpaid as compared to the market.

A similar request came from another tech startup, and they wanted validation of their pay scales to be able to decide on increments and salary review. They needed objective data from similar companies, to substantiate their pay levels and deiced how they should manage increments etc.

While its good to refer to benchmark, compare and make informed decisions. There are situations in which the concept of benchmarking just becomes a fancy exercise, with no relevant outcomes. The two businesses as mentioned above are kind of unique, small (< 200 employee), and the availability of  clean and usable data in such scenarios in not forthcoming.  Thereby making a proper exercise expensive and without adequate reliability of data that gets captured in the report.

Now, in such scenarios I provide broad benchmarks and insights from markets to the clients, I normally not recommend a detailed compensation benchmarking exercise. I believe that considering where these companies stand in their business life cycle, it may not be wise to splurge on activities that won’t yield adequate ROI. A detailed study will be expensive and may not result in a reasonable value, considering the limitations of the study and limitation of available data for the segment.

Some aspects of small companies and start-up’s that limit proper benchmarking – the work processes are not yet evolved, the role definition changes almost every month, there is a multitude of overlaps between the jobs, and many people are doing multitasking. It’s the way things are. Even once they start aggressive growth, the processes, roles, jobs are far from evolved. If a role is not adequately defined, who or what will you benchmark with? Also, in high growth start-ups , the career movements are quite fast and are totally dependent on business need, cash flows etc.

The exercise won’t work, and it won’t give you the answers – because – the roles and jobs that you define may or may not be similar to similar jobs in benchmark companies, a Software Developer can be one making X, and another Software Developer can be making 5X. Even if two companies in similar domains, one might be funded and may have a better-quality talent pool, the other might be working boot strapped with trying to stretch the dollar where they can. The work processes, technology, quality of talent pool, talent strategy might be different.

With these limitations – if you mandate a compensation benchmarking exercise, or any similar benchmarking intervention – it would be too presumptuous to really think that’s going to help your business. It may just be a psychological milestone and a face saver in front of employees – and if that’s the intent – go for it. Plus, such exercises if conducted properly are expensive, unless you refer to a readily available report (like the ones made by some good HR Consulting firms) and available surveys which in most cases won’t give you needed answers. Any benchmark in these reports will be based on a variety of data points and will throw some kind of ranges with a big spread and with further end up confusing you. It may be more relevant to talk to 5 friends in similar business, a few job applicants who land up for interview and get a perspective on how the market is moving and work around these averages.

So, can there be a simple option that serves as a data point without getting in to expensive benchmarking exercises ? Your staff compensation and salary benchmarks have to based on business needs, the businesses paying capacity – status of funding, growth, revenue, extra cash; talent availability, churn in your business domain, the related functional domain etc.  Keep a watch on market – while interviewing people, while scanning through job databases and keep estimates that are offered in the market. Based on these insights and based on your company’s finances identify what works for your business.

If you are a small business that is limited on cash flows and funding you may have to find ways to find talent that are good but are within your salary benchmarks. If you are well funded, you can play around and pay like Google & Facebook, but then you need to be sure that the next round of funding is on way. If you have issues retaining people and your business is short on cash – devise ways to retain them – be creative, but don’t promise them the moon just because some one else did.

This is an interesting subject, with lots of dimensions and lots of variables involved. Share your thoughts or connect if you want to discuss more.

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