This story is part of our Salary Series, where we take a deep dive into the world of pay: how it's set, how it's changing and what's next. Read the rest of the series.
What happens when tech companies give employees extreme visibility into how their salaries are set?
Some employers are getting ahead of the movement toward transparency with new salary-calculator tools designed to show how the sausage is made, to a previously unheard of degree. These calculators are allowing some companies to issue "first and best" offers and cut negotiation entirely out of the recruiting process.
GitLab's compensation calculator allows not just employees but also candidates in the pipeline to calculate their total rewards — or combination of cash, equity and benefits — as well as see how their pay would change if they were to relocate, switch levels or move into a different department.
This level of transparency has traditionally been unpopular with CFOs and managers, with compensation experts likening it to opening up a Pandora's box. GitLab was unable to speak to Protocol due to a pre-IPO quiet period, but the company explained in a blog post: "People with the same attributes should earn the same. The Compensation Calculator reduces unconscious bias or giving higher pay to individuals who can negotiate better."
GitLab's not alone. Even public tech companies are moving towards openness. In June, Google announced a new Work Location Tool that allows its employees to calculate how their compensation might change if they were to move to another city.
Introducing: the offer letter 2.0
One arena where startups are opening up: the offer letter. More companies are ditching simple one-pagers for interactive, visual letters that lay out different equity compensation scenarios, helping candidates better evaluate their offer as well as decide what form they want their compensation to take.
Interactive offer letters like this "help reduce information asymmetries between the enterprise and candidates," said Thanh Nguyen, co-founder and CEO of OpenComp, a compensation planning software.
A few years ago, it was common for startups to only disclose the base salary and number of shares in the offer letter, according to David St. Geme, VP of product management at Origin, a financial planning platform. Today, the talent market is so competitive that companies feel compelled to share more context around that share count, said St. Geme. An employer using Origin's visual offer letter tool, for example, might disclose to the candidate whether those units are ISOs or RSUs, what the strike price is and when they vest.
"The root of it was, 'Can we teach people to think much more like an investor than an employee?'" explained Kenny Mendes, the head of finance, people and operations at Coda, a document startup that uses an interactive offer letter. For Mendes, being transparent helps motivate employees, and it reminds them "how big of an owner they are."
Although savvy job candidates have been building similar tools in Excel on their own for years, "folks that don't have those skills are left out in the dark," said Katie Hughes, a partner at General Catalyst, which also has a compensation calculator that it shares with its founders to help them better attract talent.
Choose your equity
Coda's offer letter takes transparency several steps further. Beyond spelling out share count information, the company also discloses what that translates to in terms of percent ownership of the company, information that most startups keep secret. Coda also gives prospective employees three choices: one offer that is heavier on stock and lighter on base, one that is higher salary than stock and one in the middle.
"If you do this correctly, they totally flip from trying to maximize their salary to trying to maximize their equity," said Mendes.
There's disagreement in the compensation space about how equitable this practice is. Some believe giving employees a choice between different levels of equity compensation could lead to pay inequity in the long run and favor employees who are willing to take more risk. Inequities in cash can easily get fixed with a merit cycle, but "once you grant the shares, you can't reclaim them," said Matt Schulman, the founder and CEO of Pave, a compensation software startup.
Leveling up? Calculate your new salary.
Similar to GitLab's compensation calculator, platforms like Origin and Pave offer employers ways to increase transparency around how pay corresponds to levels and teams. A Level One software engineer might be able to see the steps required to be promoted to Level Two, for example, as well as the corresponding salary and equity range.
"That's highly valuable," said St. Geme, who also pointed out the correlation between this level of transparency and employee retention.
According to Schulman, only two or three companies on Pave are using the platform to show employees the compensation bands for their level as well as adjacent levels. "My belief is that that is the direction the industry will end up in, but it's going to require more early adopters," he said.
What's the upside? DEI and retention.
With "The Great Resignation" high on the minds of executives and recruiters across tech, the issue of increasing retention has spurred some companies to open up their pay practices and consider revealing closely-guarded figures that previous generations of HR professionals would have balked at disclosing.
At Pave, compensation is calculated based on market rates for the job type, level and location, and the company pays at the 75th percentile of its peers, numbers all determined by the platform's own benchmarking data. Offers are "first and best," and there is a firm "no negotiation" policy.
"We've lost a few candidates because we didn't negotiate, but that's a cost we are willing to take," said Schulman, who believes this type of transparent salary calculation process is paramount to being truly equitable and inclusive in hiring. Pave, similar to Coda, also discloses the fully diluted shares outstanding with employees, which allows them to calculate ownership percentage and better understand the full implications of their equity package.
"We've had virtually no retention issues," said Mendes of Coda. "Our tenure is off the charts," which he credits to the company's unique compensation transparency and equity philosophy.
Schulman echoes the sentiment. "Our close rates have been extremely high," and candidates have told him they appreciate the knowledge. According to Schulman, the 2-year-old company has not seen any turnover yet.