It’s a troublesome trend for startup founders. An engineer spends two or three years at a company before getting an outside job offer that would double their salary. It leaves their current employer with a dilemma: Beat the offer — pushing that engineer’s salary far ahead of their colleagues’ — or lose more talent.
Tech salaries are increasing faster than many companies can keep up with, and that market is threatening startups’ efforts to pay employees in high-demand job areas — engineering, product, design and operations — within consistent salary bands. Ensuring pay equity is already a challenge for high-growth startups, and these pressures are making it even harder.
“We all want pay equity, but at the same time, there’s this tension, this market demand that is so real and is happening every day to our founders,” said Katie Hughes, executive talent head of the venture capital firm General Catalyst. “How do they respond in a way that allows them to maintain the most competitive workforce?”
Hughes calls it “re-trading” because, since the requests are so big, they’re more like renegotiating an offer than asking for a typical raise or equity refresh. Hughes has seen this happen again and again among GC’s portfolio companies.
“To have one of your top engineers come back and re-trade two years in because they have a super competitive offer — it’s really hard to manage, and I think we’re seeing a decent amount of that because the market has changed so quickly,” Hughes said.
How we got here
The successes of public companies over the last two years are partially to blame here: Tech companies that boomed on the pandemic-era stock market have had a ton of leverage to recruit candidates with both cash and stock, said Ashish Raina, managing consultant at Optimize Talent.
For pandemic darlings like Zoom and Peloton, “your ability to throw money at problems was a lot easier,” Raina said. Some public companies have since flopped or cut valuations, but this influx of generous compensation packages shot up the whole market average, including at startups.
Thus, many tech companies are now budgeting for bigger annual raises than usual. The 3% annual pay increases that Raina is used to seeing are now averaging 5% to 7% per year.
“You’re seeing a much more aggressive push in terms of saying, ‘Hey, we need to set aside more budget in order to retain talent and keep pace with the market,’” Raina said.
Two companies in Raina’s portfolio even decided to offer an across-the-board inflation increase, which Raina doesn’t typically recommend. One offered a 4% bump, and the other gave out a 7.5% increase.
But that’s likely not enough to bring about pay equity on its own as employees job-hop or re-trade their offers.
How to manage pay equity
The big problem here: As the market encourages job-hopping with big pay increases, employees with long tenures may fall behind frequent job-hoppers in terms of pay.
Companies have a retention interest in correcting for pay equity across categories like role, level and location. Credit Karma overhauled its entire compensation system, which cost $15 million and resulted in raises for 98% of employees. Startups are generally spending fewer resources in auditing for pay equity specifically across demographics like gender, race and ethnicity, Raina said.
“It’s not that companies don’t care about pay equity, but they often are facing structural issues and resourcing issues that prevent them from fully tackling those issues as well as they could,” Raina said. “Resourcing-wise, people aren’t spending as much time as they could on those topics.”
Hughes is advising her portfolio companies to be proactive about compensation: Look at the market and offer raises at least once or twice a year in order to keep up.
Once a year is really a minimum now. Many companies are taking a “reactive” or “as-needed” approach to catching up with the market, Raina said. Big companies have the resources to be more proactive, but that’s not the norm among the kinds of 200- to 800-employee startups that Raina works with.
Setting a higher baseline for minimum pay for each job category is also key. Companies may also want to refine their systems around performance assessment, Raina said: Every budget has a limit, so leaders need to prioritize and allocate.
“You may not be able to do something for everybody,” Raina said. “You have to figure out, ‘OK, what is it that I can actually afford to do?’”
And, Raina pointed out, ensuring total pay equity isn’t the goal in every situation.
“Not everyone is deserving of that, either, right? You might have someone who’s a low performer. You might have someone who took a ton of equity and got very low cash,” Raina said. “You realize this picture isn’t as clear-cut as it seems when you look at the actual individual employee.”