G2 Playbook: Compensation Basics

G2 Venture Partners Playbook Blog Series

We have a playbook at G2 which we’ve developed while investing together over fourteen years in well over a hundred companies. We’ve seen every possible outcome, from spectacular public exits to wind-downs. Each executive team and company with whom we partner is unique, but there are a set of common operating principles that we find works across industries, business models, stages, and geographies. These principles make up our playbook.

Over a series of posts, the team at G2 Venture Partners will share highlights from our playbook. Climate and industrial tech entrepreneurs are building the next set of trillion dollar businesses right now. Our goal is to be investors alongside those leaders, supporting iconic companies that drive sustainable economic growth. But even if we’re not on the cap table or board, we hope these highlights from our playbook help those founders build more successful companies.

These highlights are only the surface of the playbook. Reach out to learn more.

Chapter 2: Compensation Basics

Compensation is high on the list of topics we discuss with portfolio companies and founders. As investors and board members, our job is to support founders in setting up compensation structures that attract the most talented team members while managing the resources, cash, and equity needed to build that team.

There are dozens of more granular topics within the broader compensation bucket that we’ve built Playbooks and perspectives around, including milestone-based equity grants, equity refreshes, board compensation, options vs. RSUs, exercise windows, international / distributed hiring, etc. For now, this is meant to just be a flyover, and we’ll dive into some of those other topics in future posts.

1) Align on a philosophy

This sounds easy, but it’s not. What is the goal of your compensation program? Is it to pay 90th percentile rates to “win” every competitive hiring process? Is it to pay 25th percentile and give space for a larger team? Is it meant to encourage working from a headquarters or support distributed teams?

2) Assign responsibilities

When companies are founded, CEOs make compensation decisions on their own. Over time, an HR function might be built or a board-level Compensation Committee might be formed (we find that this becomes an efficiency boost once boards grow to 5+ people).

The bulk of a company’s hiring is below the C-level. For these hires, we find it’s easiest to have the board and CEO (or HR team) agree to a set of predefined bands within a comparable data set (e.g., 50th to 75th percentile). Within these bands, responsibility for compensation decisions lies with the CEO (or their HR team). To stretch above, typically the board (or Compensation Committee) would be looped in.

CEO and other C-Level compensation is treated differently, with more interaction between the board and CEO and final decisions typically made by some subset of the board (and often there are separate shareholder approvals required for C-Level compensation).

3) Get the data

Compensation is often discussed in percentile terms, e.g., “this compensation package is in the 75th percentile for a CMO in cash, 50th percentile for equity”, meaning that this candidate would be paid more than 75% of CMOs at comparable companies, and have an option (or other equity) package that’s better than half of their peers.

But, how do you decide what companies should be included in that set of “comparable companies”?

The best compensation comparables are similar in:

• Company stage (ideally measured by revenue, as one Series B company may look very different than another, but two startups with $20m in revenue are likely hiring from similar pools)
• Company sector / industry (it’s OK to be general here, but it’s important to capture that different functions have different values for different kinds of companies)
• Individual function (engineering, marketing, operations, etc.)
• Individual level (measured in # of layers below CEO)
• Individual and company location

Location can be tricky with the rise of remote work. 62% of new employees onboarded to Carta’s cap table management program were in a different state than company HQ in 2022, up from 35% in 2019. But, 84% of employers are doing some form of geo-adjusting compensation packages to account for the cost of living or to incentivize non-remote work (data from Carta). Net — benchmarks should start with the company location, but likely have a standard set of adjustments to make based on remote work factors.

In terms of the tools to build these benchmarks, we find Pave to be the go-to public (but paid) resource. They also acquired the second tool that would have been on this list, Option Impact, and now publishes the third tool we would have referenced, the VCECS (Venture Capital Executive Compensation Survey). We also have more detailed internal benchmarks at G2 with more nuances than are available on platforms like Pave.

Finally, we want to stress how important data is in reducing biases and increasing equity throughout an organization. The comparables data gathered in this process is not influenced by someone’s compensation at their last job or demographics.

4) Sell the dream

Once a compensation philosophy is in place, with responsibilities assigned to design and execute a plan, a perfect comp set identified, and data gathered, the team (CEO, HR, investors, board and anyone else involved in hiring) needs to become great at communicating the value of the package, specifically the value of the equity. Startups sell their products to customers, and equity to investors, but they also need to sell that equity to potential employees.

How does an employee know whether it’s a good or bad thing to receive 100,000 options in a company at a $1.00 strike price? The recruiting team needs to be able to articulate how that becomes incredibly and unreasonably valuable: “The Series C investors paid $Z per share, and they expect to receive a minimum of a 5x return, which would make your 100,000 shares worth $Xm. If we reach X product/market milestone, which you’ll contribute to in your role, we can get to $100m in revenue and would be well on our way to hitting that level of return.” (note: talk to employment counsel before quoting any numbers about how valuable equity can be, because, of course, it can also be worthless and companies should not give financial advice to employees).

5) What about consultants and recruiters?

Recruiters can be great resources to both support executive hiring (more on that in a future post) and give data points around compensation ranges. These shouldn’t supplant the work outlined above that’s done by a company and its board, but can be incorporated into it.

Compensation consultants have a role to play but typically only in much later stage companies (e.g., public companies), and we don’t often use them to support earlier stage businesses.

Wrapping up

Designing the right compensation structure takes work, but if done well, can help attract great talent to your team, reduce churn, and improve fairness and equity throughout your organization.