A cautionary tale: High-profile layoffs confirm the importance of foolproof hiring plans
When companies enter a phase of aggressive growth, executives must create compensation packages that attract rockstar employees.
The first quarter of the new year saw a number of headlines heralding mass layoffs at high-growth companies. Peloton announced recently it would let go of 2,800 employees worldwide — about 20% of the company’s corporate workforce, according to reporting from the New York Times. Only a few days earlier, beauty brand Glossier announced it would lay off a third of its workers.
Both announcements followed periods of high growth. Peloton’s revenue skyrocketed 66% in the first three months of 2020 compared to a year earlier. And Glossier raised $80 million in Series E funding last summer.
Related: Q&A: Rebuilding employee trust after layoffs
Peloton and Glossier aren’t the first companies to deal with these problems, and they won’t be the last.
When companies enter a phase of aggressive growth, executives must create compensation packages that attract the rockstar employees who will carry their company to scale. But employers — startups, in particular — don’t always know what competitive pay looks like, especially considering differences in roles, experience and location. What’s more, employers have to develop hiring plans that manage burn rate… or risk running out of money.
The stakes are high, so how can business leaders make sure they get hiring right?
Attract workers, not layoffs
Using reliable and relevant data, employers can make a hiring plan that’s nearly foolproof. Such a plan will help companies decide what their compensation packages look like, determine how many people they can afford to onboard, and anticipate the range of what their talent could cost.
Companies are hyper-focused on attracting good workers as they battle the great resignation and other consequences of the pandemic. It’s always been true that compensation rates affect offer acceptance, engagement and attrition. But the current labor market has caused compensation packages to balloon as employers fight to find and keep workers. Amazon, for example, announced that it more than doubled its maximum base salary from $160,000 to $350,000.
At the same time, leaders have to ensure that compensation packages don’t generate too much spend and dilution. Compensation is the biggest budget item for most high-growth companies, and startups and public companies alike set themselves up for failure if they lack a hiring plan that intelligently balances available cash and equity against burn rate and dilution.
Benchmark offers & pay, while setting pay ranges
These dueling priorities make compensation tricky. But if the news about Peloton and Glossier makes one thing clear, it’s that compensation isn’t a guessing game. It’s a task that requires a scientific approach.
When building a staff and setting pay, business leaders need to do more than hope the market surveys that report pay data are accurate enough. They can’t rely on past experience or their colleagues’ history to set a salary. The consequences are just too big to ignore.
The importance of good data can’t be overstated. Fast-growing companies need data and benchmarking that accurately reflect their peers who operate in similar industries with a similar funding size. But here’s the problem: The data sources that companies have traditionally trusted don’t offer accurate, apples-to-apples comparisons.
Reliable and relevant data will help business leaders tackle the next must-do on the path to intelligent hiring: set pay ranges. Accurate pay ranges for open roles provide the necessary intel for budgeting. Imagine: If you have 100 open roles with a pay range of $100,000 to $110,000, you can plan for the most expensive scenario and make sure you end up in a good spot. What’s more, a growing number of states require companies to publish pay ranges on job offers, creating an expectation for this information among employees and new candidates.
Create a compensation philosophy
Good data and proper pay ranges set leaders up for the next step: Creating a compensation philosophy. A compensation philosophy defines the percentage of the market rate a company is going to pay and the geographical range it intends to use.
Most importantly, a compensation philosophy sets clear expectations for candidates, onboarded employees and decision-makers. CEOs just need to make sure that they can afford their compensation philosophy by validating assumptions with data and benchmarks.
Leaders will need to think through how they’ll communicate their compensation philosophy with various stakeholders. Candidates, for instance, will need to understand the nuts and bolts of the philosophy — most importantly, how much they’ll be paid and why. They will want to know how their compensation may be affected by merit cycles and benefits, too.
When speaking with existing team members, business leaders will want to emphasize consistency and transparency. In either case, a compensation philosophy allows companies to ensure that everyone is compensated fairly — especially when leaders point back to trusted data.
The last step to getting hiring right
Even if companies faithfully implement a pay philosophy, they’re still vulnerable to layoffs. Companies must also model hiring scenarios to determine the range of what their talent could cost.
To model hiring, companies use data and pay bands to generate the highest possible price and the lowest possible price of potential workers. This information helps employers understand which parts of their organizations merit the most spend. And, most importantly, it gives business leaders the information they need to make the right offers — and the right number of offers — to get the talent they need without creating too much burn and dilution.
But many companies aren’t doing this — they don’t use good enough data, factor in the minimum and maximum offers, or plan for merit cycles or equity refreshes. Just look to Peloton and Glossier.
Glossier CEO Emily Weiss took the high road when she announced the layoffs at her company, explaining why the beauty brand had to scale back its staff. “We got ahead of ourselves on hiring. These missteps are on me.”
Note her courage and transparency, but note her mistakes, too. When building and scaling a company, hiring and compensation requires high-stakes, strategic decision-making. Some business leaders aren’t treating those decisions with the certainty and accuracy they call for.
Heed these cautionary tales and enlist available science and process to help your company succeed in the long run.
Thanh Nguyen is CEO and co-founder of OpenComp, a compensation intelligence company that helps leading employers and employees make the best business and career decisions.
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