WAYPOINTS

Compensation Process

Leveling and compensation are inherently linked. This addendum outlines a default compensation process which is designed to be complementary to the rest of the framework, aiming to support engineers throughout their career, with particular attention to enabling sustainable careers at the Senior Engineer (L4) level.

Base Salary Structure

Base salaries should be determined using market data from compensation platforms like Pave. Companies should define their target pay positioning and regularly update it based on market reviews. Key factors in determining positioning typically include:

  • Geography
  • Company size, revenue, or funding stage
  • Target percentile

For example, a fast-growing FinTech company might target the 75th percentile of New York-based Series B companies. A remote company could split the country into regions or set base salaries at the 50th percentile of companies making $10M in revenue in tier-2 locations.

We recommend companies avoid salary negotiations where possible, ensuring that engineers at the same level and in the same location are hired at consistent pay rates.

Salary adjustments

Traditionally, the only way to earn more and be recognized for ongoing contributions has been through promotion. However, this can lead to level dilution and employees ending up in roles where they are unhappy or struggling.

In most organizations, there is a point where plateauing at a certain skill level isn’t harmful and can even be beneficial. We suggest that for many companies, this point is L4 (Senior). Keeping these employees happy and engaged is valuable, and we believe increasing their compensation is one way to achieve this. We want to avoid situations where strong performers feel they must leave the company to get a pay raise.

To address this, we propose two additional methods for adjusting salaries between level promotions.

Option A: Tenure-Based Adjustments

The first option is to offer tenure-based adjustments based on years of service. This could be a 2-5% increase every 2-3 years. This might result in situations where a tenured senior engineer earns more than a brand new staff engineer. In practice this is not uncommon in companies which have overlapping salary bands, but more explicitly recognizes the value of institutional knowledge.

This approach is relatively simple to administer and predict.

Option B: Performance-Based Bonuses

The second option is to lean more heavily into variable compensation based on performance and impact. Bonuses can be paid out annual or semi-annual, and should allow for significant upside in high-performance years.

This approach requires a robust performance evaluation process but can be adjusted based on company performance and market conditions, which can be beneficial in managing OpEx.

Companies should choose one approach and implement it consistently, as mixing both can create unnecessary complexity and potential inequities. You should also model your chosen model against budgets and financial plans.

Equity Compensation

We recommend following “The Wealthfront Model” for granting equity, ensuring that employees receive “evergreen grants.” This model provides continuous equity grants throughout an employee’s tenure, ensuring long-term alignment with the company’s success and reducing the need for large, ad hoc grants.

Initial Grant

  • Four-year vesting schedule
  • 25% vesting at the one-year cliff
  • Monthly or quarterly vesting thereafter

Alternatives to the traditional schedule:

  • 5-year initial vesting period
  • Back-weighted vesting — vest 10%, 20%, 30%, 40% on years 1-4

Evergreen Refresher Grants

  • Begin in year two
  • Four-year vesting schedule, no cliff
  • Sized to maintain a target steady-state equity value
  • Additional refreshers may be granted for exceptional performance

Review Process

When implementing compensation reviews, we suggest choosing between two approaches: company-wide review cycles or anniversary-based reviews. Each approach has implications for both the organization and its employees.

Company-wide reviews occur at a fixed time each year, often aligned with the company’s fiscal year or planning cycles. This approach creates a unified moment where all compensation decisions are made together. The primary advantage is operational efficiency — People Operations teams can focus their efforts during a specific period, making it easier to manage budgets and ensure consistent calibration across the organization. Company-wide cycles also facilitate better comparison between employees and teams, as all decisions are made with the same market context and company performance data.

However, company-wide reviews can create challenges. They produce compensation “cliffs” where a large portion of the company sees changes simultaneously, which can impact cash flow and create anxiety around a single high-stakes period. Additionally, employees who joined mid-year may feel their timing disadvantages them, as they might wait longer for their first review.

Anniversary-based reviews offer a more individualized alternative. Under this system, each employee’s compensation is reviewed on or near their work anniversary (consider processing the team in cohorts). This creates a more personal experience, as reviews align with each individual’s journey at the company. It also distributes the workload for managers and People Operations throughout the year, preventing the intense burst of activity that characterizes company-wide reviews. From a cash flow perspective, anniversary-based reviews smooth out compensation changes across the year rather than concentrating them at a single point.

The tradeoff comes in administrative complexity. Running reviews throughout the year requires more sophisticated processes and tools to ensure consistency. It’s harder to calibrate decisions across the organization when reviews happen months apart, and budget management becomes more complex as decisions are spread across multiple periods. Market conditions might also change significantly between reviews of similar employees, potentially creating perceived inequities.

Regardless of the approach, certain principles remain important:

  • Reviews should consider both market data and individual performance
  • Decisions should be documented with clear rationale
  • Communication should be transparent and timely

Conclusion

Effective compensation processes need to support both organizational goals and individual needs. This leveling framework acknowledges that many engineers will find their sweet spot at the Senior Engineer level, where they can focus on engineering excellence rather than taking on more responsibilities and deepening organizational impact. By providing clear mechanisms for compensation growth through either tenure recognition or performance bonuses, organizations can support these career choices while maintaining market competitiveness.

The key to successful implementation lies in clarity and consistency. You must make deliberate choices about your market positioning, review cycles, and growth mechanisms, then communicate these decisions transparently.