Use this skill when benchmarking compensation, designing equity plans, building leveling frameworks, or structuring total rewards. Triggers on compensation benchmarking, equity grants, stock options, leveling, pay bands, total rewards, salary ranges, and any task requiring compensation strategy or structure design.
Use this skill when benchmarking compensation, designing equity plans, building leveling frameworks, or structuring total rewards. Triggers on compensation benchmarking, equity grants, stock options, leveling, pay bands, total rewards, salary ranges, and any task requiring compensation strategy or structure design.
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Compensation Strategy
A structured framework for designing, benchmarking, and communicating
compensation programs. This skill covers the full total rewards stack - from
salary bands and equity grants to leveling frameworks and pay equity audits -
with an emphasis on when to use each approach and how to justify decisions
to candidates, employees, and leadership.
When to use this skill
Trigger this skill when the user:
Benchmarks a role against market data (Levels.fyi, Radford, Mercer, Carta)
Designs or revises pay bands for a level or job family
Structures an equity grant (ISOs, NSOs, RSUs) or refresh program
Builds or updates a leveling framework (IC and/or management tracks)
Creates a total rewards package (salary + equity + benefits + perks)
Conducts or responds to a pay equity audit
Writes or revises a compensation philosophy document
Explains compensation structure to a candidate or employee
Do NOT trigger this skill for:
Recruiting sourcing tactics or interview process design (use a hiring skill)
Payroll processing, tax withholding, or benefits administration (use an HR
operations skill)
Key principles
Pay transparency builds trust - Employees who understand how pay is
determined are more engaged and less likely to leave over perceived unfairness.
Document your philosophy, publish band ranges internally, and explain
progression criteria clearly. Opacity breeds resentment.
Market data, not gut feel - Compensation decisions made from intuition
drift out of market over time and introduce bias. Anchor every band to at
least two external data sources refreshed annually. "We've always paid this
way" is not a compensation strategy.
Total rewards, not just salary - Base salary is one line in a larger
equation. Equity upside, health benefits, PTO policies, remote flexibility,
and career development all have real economic value. Design and communicate
the full package - candidates and employees do math.
Equity is a retention tool - Equity without a vesting schedule is a
signing bonus. Structure grants to align long-term incentives: 4-year vesting
with a 1-year cliff is the standard, but refresh grants and accelerated
vesting on change-of-control matter equally. Design equity with departure
scenarios in mind.
Review annually at minimum - Markets move. Inflation erodes purchasing
power. Competitors raise bands. A compensation structure that was competitive
18 months ago may be 15% below market today. Schedule mandatory annual
reviews; trigger ad-hoc reviews when attrition spikes or a survey shows
significant movement.
Core concepts
Compensation components
Component
Description
Typical form
Base salary
Fixed annual cash paid on regular schedule
Bi-weekly or semi-monthly paycheck
Variable/bonus
Performance-linked cash paid periodically
Annual bonus, quarterly MBO, commission
Equity
Ownership stake in the company
ISOs, NSOs, RSUs, ESPP
Benefits
Non-cash protections and programs
Health, dental, vision, 401(k) match
Perks
Discretionary extras
Remote stipend, L&D budget, PTO
Total compensation (TC) = base + expected bonus + annualized equity value + benefits value.
When comparing offers or setting bands, always use TC - base-only comparisons
are misleading, especially at senior levels where equity is the majority of value.
Market percentiles
Compensation surveys report pay at percentiles of the market. The standard
anchor points:
Percentile
What it means
Typical use
P25
25% of market pays less
Below-market, acceptable for high-equity early-stage
P50 (median)
Middle of market
Default anchor for most companies
P75
25% of market pays more
Above-market, used to compete for talent in hot roles
P90
Top decile
Reserved for critical roles or FAANG-adjacent competition
Most companies target P50 base + P75 equity, or P75 base + P50 equity. Decide
your strategy based on what stage you are at and where you want to compete.
Pay bands
A pay band (or salary range) defines the minimum, midpoint, and maximum for a
given level. Key parameters:
Spread: max - min, expressed as a percentage of the midpoint. Typically
50-80% for individual contributor roles. Wider bands allow more flexibility;
narrower bands reduce manager discretion.
Midpoint: the target market rate (usually P50 or P75 of survey data).
Overlap: adjacent bands share some salary range, allowing a high performer
at L3 to earn more than a new hire at L4 without an immediate promotion.
Compa-ratio: employee's salary / midpoint. 100% = exactly at midpoint.
Ranges of 85-115% are typical. Outside this range triggers a review.
Equity types
ISOs (Incentive Stock Options), NSOs (Non-Qualified Stock Options), and RSUs
(Restricted Stock Units) are the three main forms. See
references/equity-guide.md for detailed comparison, tax treatment, and vesting
patterns.
Vesting schedules
The standard is 4-year total vesting with a 1-year cliff:
Year 1: 0% vests (cliff period) -> 25% vests at 12-month cliff
Years 2-4: monthly vesting at 1/48th of total grant per month
Variations to know:
Back-weighted vesting (10/20/30/40): rewards long tenure, retains people
longer but feels unfair early on
Monthly from day one (no cliff): common at later-stage or public companies
for senior hires
Refresh grants: new grants issued annually or at promotion to top up
unvested equity and reset retention incentives
Acceleration: single-trigger (on change of control) or double-trigger
(on change of control + involuntary termination) - always use double-trigger
for employees
Common tasks
Benchmark a role against market
Goal: Determine whether current or proposed pay is competitive.
Data sources by use case:
Source
Best for
Cost
Levels.fyi
Public tech companies, IC engineering/PM
Free
Carta Total Comp
Startups (pre-IPO), equity benchmarking
Paid
Radford (Aon)
Enterprise tech, broad job families
Paid (survey participation)
Mercer
Non-tech industries, HR and operations roles
Paid
Glassdoor / LinkedIn Salary
Directional check, wide variance
Free
Option Impact / J.Thelander
VC-backed startup equity norms
Paid
Methodology:
Define the job family and level precisely (use internal level definitions)
Pull data from at least two sources at the same percentile target
Normalize to the same geographic region (use location factors for remote roles)
Compare TC, not just base (include equity at current 409A or public price)
Document sources, date pulled, and percentile used - this becomes the audit trail
If two sources diverge by more than 15%, pull a third source and average the
two closest. Do not cherry-pick the lowest to justify underpaying.
Design pay bands
Step-by-step:
Decide your percentile target (P50 for market-rate, P75 for above-market)
Set the midpoint to that percentile for each level
Apply a spread: 50% spread means min = midpoint * 0.75, max = midpoint * 1.25
Check band overlap: adjacent bands should overlap 15-25% to allow flexibility
Validate existing employees fall within or near their band (flag outliers)
Set a review cadence (annually minimum; trigger on survey data shifts >5%)
Example band structure for a 4-level IC track:
Level
Midpoint
Min (75%)
Max (125%)
L1
$100k
$75k
$125k
L2
$130k
$98k
$163k
L3
$170k
$128k
$213k
L4
$220k
$165k
$275k
Bands should be wide enough to reward growth within a level without requiring
promotion, but narrow enough that managers cannot rationalize dramatically
underpaying new hires.
Structure equity grants
Equity grant amounts depend on company stage, role level, and market norms.
Starting guidelines (adjust for company-specific dilution expectations):
Stage
Level
Typical initial grant
Form
Seed (pre-product)
Senior IC
0.25-0.75%
Common / ISO
Series A
Senior IC
0.10-0.30%
ISO
Series B/C
Staff / L5
0.05-0.15%
ISO
Series D+ / late stage
Staff / L5
0.02-0.06%
ISO or RSU
Public company
Staff / L5
$150k-$400k value
RSU
Grant sizing process:
Determine grant value in dollars (use 409A for private; use 30/60/90-day
average for public)
Divide by share/unit price to get share count
Set a 4-year vesting schedule with 1-year cliff (standard)
Document the refresh cadence (typically annual, sized at 25% of initial grant)
Build a leveling framework
A leveling framework defines career progression expectations. The minimum
a useful framework must specify per level:
Scope: what is the person responsible for? (task, project, domain, org)
Impact: what outcomes are expected? (individual, team, company)
Execution: how do they work? (guidance needed, independent, leads others)
Communication: who do they influence? (peers, team, leadership, external)
IC track skeleton (5 levels):
Level
Title
Scope
Impact
L1
Associate
Assigned tasks
Completes reliably with mentorship
L2
Mid-level
Small projects
Delivers independently
L3
Senior
Full projects, owns domain
Elevates team quality
L4
Staff
Cross-team initiatives
Org-level influence
L5
Principal
Company-wide problems
Sets technical direction
Add a parallel management track starting at the Senior equivalent where team
leads split from IC. Keep the IC track viable all the way - not everyone wants
to manage and forcing the path creates attrition.
Design a total rewards package
Total rewards = compensation + benefits + perks + culture/career. When
structuring a package for a role or level:
Anchor base salary to market data at your chosen percentile
Set equity using stage-appropriate grant sizing guidelines above
Layer benefits: health (medical/dental/vision), 401(k) with match,
life/disability insurance - these are table-stakes for any full-time role
Add perks that align with your culture: remote stipends, L&D budgets,
wellness allowances, parental leave beyond statutory minimums
Document the full TC in offer letters and annual statements so employees
understand the total value - most people underestimate the cost of benefits
Remote-first companies: publish a location factor policy upfront. Paying
San Francisco rates to everyone is expensive; paying rural rates to people
in NYC creates resentment. Tiered geographic zones are the standard approach.
Handle pay equity audits
Pay equity audits detect and correct unjustified pay differences between
employees doing similar work, typically analyzed by gender, race, and ethnicity.
Audit process:
Define comparable groups (same level, same job family, similar tenure band)
Run regression analysis controlling for legitimate pay factors (level, tenure,
performance rating, location)
Calculate adjusted pay gaps: differences remaining after controlling for
legitimate factors
Set a remediation threshold (commonly: flag gaps >5% in adjusted analysis)
Correct identified gaps in the next compensation cycle, not "eventually"
Repeat annually; document findings and remediation actions
Conducting an audit does not create legal liability - failing to conduct one
and being unable to explain pay gaps does. The audit creates the paper trail
that demonstrates good-faith effort.
Communicate compensation philosophy
A compensation philosophy statement answers five questions:
What market percentile do we target and why?
How do we think about total rewards vs. cash-only?
How is equity structured and what does it mean for employees?
How does pay progress with performance and tenure?
How often do we review and adjust pay?
Write it in plain language. Avoid jargon. Publish it to all employees, not
just HR. Update it when strategy changes. A philosophy that cannot be explained
in a 10-minute conversation is not a philosophy - it is a policy document that
no one will read.
Anti-patterns
Anti-pattern
Why it's wrong
What to do instead
Setting pay from the last person's salary
Anchors new hire pay to arbitrary history, not market; propagates historical bias
Pull fresh market data for every open role before setting the offer range
Exploding or "take it or leave it" offers
Creates resentment, signals bad faith, and causes candidates to question company culture
Give candidates reasonable time (3-5 business days minimum) and explain all components
No equity refresh grants
Unvested equity drops to zero at tenure milestones; employees become "golden handcuff free" and leave
Issue annual refreshes sized at 25-50% of initial grant; tie to performance rating
Compression - new hires paid more than tenured employees
Destroys morale when discovered; tenure becomes a penalty
Audit for compression when setting new hire offers; adjust tenured pay in same cycle
Subjective performance ratings driving pay
Introduces manager bias into compensation; obscures actual criteria
Use calibrated, criteria-based performance rubrics tied to level expectations
Designing equity without tax guidance
Employees make poor exercise decisions due to AMT, 83(b) elections, and QSBS; creates legal exposure
Provide a tax FAQ, recommend personal tax advisors, and document ISO/NSO differences
References
For detailed guidance on specific compensation topics, read the relevant file
from the references/ folder:
references/equity-guide.md - ISO vs NSO vs RSU comparison, vesting patterns,
tax treatment, early exercise, 83(b) elections, QSBS
Only load a references file when the current task specifically requires it -
they are detailed and will consume context.
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