Pay Your Team Right: A Comprehensive Guide To Compensation

For many companies, labor cost is by far the biggest cost position. But in today’s world with every increasing transparency and shortening tenures, how do you get compensation right?

What are the mistakes to avoid and the components to consider?

This blog post gives you the comprehensive answer:


    • Why compensation is important

    • How to structure your fixed salary components

    • What options for variable pay are there

    • How to pick the right perks and benefits

    • What allowances are and what to pay them for

    • What long-term incentives are out there

    • How strategy and finance influence compensation

Let’s go!

The role of compensation

There is a global trend of increasing labor shortage. The effect of baby boomers retiring, for some industries accelerated by COVID-19 has led to a dramatic shift in the employment market.

Employees have much more freedom picking their jobs or changing jobs then a decade ago.

Next to effective recruiting, getting compensation right is one of the most important tools to position your company well in the market.


A competitive and attractive compensation will hugely influence your employer value proposition. The total value an employee gets out of working with your company comprises many factors.

Compensation is an important one.


Considering the direct and indirect cost of hiring and the labor shortage, keeping the team you have is critical. A fair and adequate compensation package can serve as a retention tool.


Lastly, especially the variable and long-term compensation components are a proven tool to influence behavior.

Now that we have established why and how compensation is so important, let’s look at the different components and how to design them.

Base or fixed salary

Base or fixed salary is the cornerstone for your compensation systems. In most settings, it makes up for largest part of overall compensation. But what influences the base pay? And how do you structure fixed salaries across your companies.


The first consideration for your fixed salary will be: What’s the general pay scale I need to pay for a specific role or in a specific industry.

The general level of pay in investment banking is much higher than for cleaning jobs.

The general scale and level of your base pay + variable pay will determine how competitive your salary package is.

There are multiple research companies out there that can give you the exact pay scales for a role you’re trying to fill.

Or you rely on the ever-increasing number of publicly available salary numbers ( and the like).


The next dimension that often influences fixed salaries is the level of experience someone brings. Experience could be assessed by:


    • Time someone has spent in an industry or function

    • Specific skill sets or know how someone has acquired

You usually have to pay more for experienced people (duh).


Regardless of one’s experience, you also have to consider how proficient someone is the very role they hold.

To what extent can a person cover the current role they hold.

Example: You have been a travel agent with a business travel agency for 10 years. You now enter a luxury, bespoke travel provider. Chances are that you won’t fill out the job from day one.

The same is true if you get promoted in a more senior position.


The next question to answer is how you deal with the level of seniority someone has acquired. In addition to experience, seniority includes an acknowledged set of skills and competencies that an employee has.

Example: You can be a very experienced web developer, who has had different dev jobs across different companies for the past 20 years.

Or, you have worked as a CTO for two tech companies in the past 10 years. Shorter experience, more seniority.

Seniority has a lot to do with the classical career ladder, where people climb up the ranks as they progress through their career.


The type of position you’re looking at will determine your level of base pay to a great extent, regardless of industry. Harder to find, more skilled profiles are compensated higher than more commonly available skill sets.


Where you pay a salary will have a great impact on the height of that salary. That question becomes especially important when you operate in multiple locations.

And don’t think about different countries or continents. Even in much more local settings, location matters. It makes a big difference of whether you’re paying people in NYC or in upstate New York.


A specific form of these questions is faced by remote organizations: How do I pay people that do the same job, but have a totally different cost of living based on geography.

There are three options:


    • Pay the same, regardless of location

    • Make full use of global arbitrage

    • Something in between


In addition to comparing your salary with other companies, the internal comparison matters as much. Will two employees doing the same job earn the same money? Are differences between roles justified?

Equity has no motivating factor. But if people feel they’re treated worse than the next person, it has a brutally disengaging and demotivating effect.


We’re only talking about base salaries, but there are already quite some components. As you grow, you’ll have to determine base pay for many different roles and situation.

It makes sense to write down your compensation model. This will help with perceived equity and speed of determining future salaries.

An example for a fully defined compensation model:


    • Pay scale: We want to pay 10% above average

    • Experience: We can increase salary up to 5% for very experienced candidates

    • Seniority: We have three seniority levels for all of our functions: Regular at 100% salary. Senior at 130% of the salary. VP at 180% of the salary.

    • We’re based out of San Francisco. We increase or decrease base salary by 20% of the difference in cost of living, compared to San Francisco.

    • Job-related maturity: People might earn up to 5% less when they start in a role they don’t fully fill-out. They then progress into 100% for that role within 1 year.


Let’s assume we’re looking at Jane, a very experienced Senior UX Designer, based out of Wisconsin. She needs to learn a lot about your way of designing user experiences.


    • Pay scale: USD 130,000 for a UX Designer in San Francisco. We pay 5% above average, so USD 136,500.

    • Experience: The candidate is experienced, so we increase salary by 5%. USD 143,500.

    • Seniority: Jane is a Senior UX Designer so earns 30% above base. USD 186,600.

    • Geography: Cost of living in Madison, WI is roughly 40% lower than in San Francisco. We decrease salary by 20% of that (8%). USD 171,700

    • Job-related maturity: We are recognized to be leaders in UX design, so Jane might need some time to learn how we do things here. Decrease of 5% as Jane won’t fill the job out fully from the start. USD 163,115

In our example, Jane would be offered/paid a salary of USD 163,115, with a target salary after one year of 171,700.

Like all models, you would need to refine that model as you use it. The better the model gets, the more usable will the outcomes be.

Also, you don’t have to be rigid about all components of the model and leave some judgement room for flexibility.

The beauty about a rigid model is that it helps with equity. If you have a fair and transparent way to determine salaries you pay across the team, it’s much easier to be transparent about it.

Variable compensation components

Now that the base salary is defined, it’s time to look at variable components.


First, it makes sense to define your goals. What do you want to achieve with your variable compensation components? A few ideas:


    • Motivate individual performance

    • Acknowledge outstanding performance as an exception

    • Comply with industry standards to be competitive

    • Foster team work

Defining your goals will help to pick what’s best.


To assess what variable compensation models make sense, it’s helpful to know the expectancy theory. This model looks at:


    • the effort an employee puts in

    • the performance this generates and

    • the outcome that’s tied to this performance.

In order for an employee to be motivated by a reward, three conditions must be met.


    1. Good effort-performance expectancy: The employee must believe that putting in the effort will produce the desired results. This has to do with training, budget, infrastructure, processes and many more dimensions. We won’t look at that here.

    1. Reliable performance-outcome expectancy: The employee mus believe that generating a certain performance will reliably and repeatedly produce an outcome

    1. Lastly, a positive outcome value: The employee must value the outcome positively.


The discretionary bonus is one of the oldest forms of variable pay. As the name says, it’s discretionary. That means two things:


    • The employee can’t count on it.

    • It depends on the individual assessment of the person assigning the bonus.

Note, that in some jurisdictions, there are rules in place that make discretionary bonuses mandatory after a defined number of occurrences.

The good thing about the discretionary bonus is the flexibility. Pay it when the company does well. Pay it to acknowledge contribution to the success.

Or don’t pay it when these criteria aren’t met.

And that’s already the problem with the discretionary bonus: People don’t know whether putting in the work and achieving goals will result in a bonus.

According to expectancy theory, this will lead to a less motivating effect of that bonus.


Another very classical variable salary component is commission. Very common in sales roles, the commission is a percentage of some form of transaction that the employee gets.

For a sales role, the commission might be 0.5% of the transaction volume. Let’s assume the sales rep makes a deal for USD 100.000, that would leave him with USD 500 commission.

The beauty about the commission is its directness and predictability. A high performance to outcome expectancy ensures that every sales rep knows exactly what outcome to expect.

On the flip side, the one-dimensional nature of the commission can lead to corner-cutting when closing deals.


A more granular approach are defined bonuses, as well as variable pay based on target achievement and performance.

A defined bonus means that you specific events that need to happen in order to be paid the bonus.

Example: If we manage to implement feature XYZ this year, you’ll be paid amount X.

With target achievement, you’ll be defining at a percentage around 100% that specifies to which extent an employee has achieved a target. Usually on a yearly basis. Then a predefined bonus is tied to it. Target can either be below 100% (underachieved) or above 100% (overachieved).

Performance based pay is usually tied to a subjective but objectified performance assessment of an employee. An example could be that you assess multiple criteria like communication, collaboration, reliability, quality of work results etc. with a numeric value. Then the sum of these values determines a specific bonus on a scale.


For all of these variable components, you can decide whether you want to use them individually, on a team- or on a company basis.

Some examples:


    • You can pay team-based commissions for the whole sales team if the sales process in your business requires collaboration

    • You could multiply the individual bonus by a certain score, determined by the company’s net profit.

    • You could set targets for the business unit and make half of the variable pay dependent on target achievement.


Beyond mathematical calculations of variable pay or individual assessments, you also have the option to involve more people into the process.

In the classical sense, committees are often comprised of people of the same hierarchical level that assess bonuses of employees of the levels below.

Negotiating and integrating bonus payments becomes necessary when


    • There’s only a limited budget for bonuses.

    • Multiple managers can assign bonuses.

    • There’s no predefined share of budget per manager or no mathematical way of assigning bonuses.

360° feedback can be a great input factor for determining variable pay. The idea is that not one person assesses an employee’s performance, but people from all “directions” – bosses, direct reports, colleagues and partners.

A more radical approach is the modern compensation committee. A group of people is selected by all employees each year. This committee then uses a predefined methodology to determine bonuses for the team.


While monetary variable components are most common, there are also other types of rewards that can be useful. Examples include:


    • money-equivalent like gifts, trips, etc.

    • recognitions like “employee of the month”

    • admissions into trainings or career advancement programs

    • mentorship or coaching offerings

    • or whatever else you can think of.

The important thing is that the employee values the reward. This can also mean that you might offer a choice between 2 or more rewards.

Perks & Benefits

Besides the salary and variable components, you might also want to offer perks and benefits to round up your package.


Healthcare plans, often with specific additions like dental or vision, are a very common benefit especially on the United States. In Europe, they’re rather uncommon due to a more comprehensive public health care system.

You might also offer specific benefits like a yearly health checkup.


Contributions to retirement plans are another very common tools in many countries (401k in the US, Riester in Germany). Usually, the employer matches the employees’ contribution to a plan defined by the government.

To incentivize saving, these contributions are often tax-exempt.


Companies often offer company cars, either as part of the compensation package for senior employees, or where required by the job profile.


A non-monetary benefit that grows more and more popular is to offer flexible paid time off solutions. In general, the flexible working time or location arrangement can be counted as a benefit.


Especially in hip startups during the late 2010s, perks received quite some attention. Perks in this context are all components of infrastructure that aim at increasing happiness and convenience for the employee.

Examples include


    • free fruit, food and drinks

    • gym memberships

    • gaming or other entertainment amenities for break times

    • Margherita Friday or any type of company paid social gatherings


Allowances are another tool you have to enrich your compensation package. Allowances are a targeted support of business or work-related expenses.

Examples include:


    • Training allowance: Give your team a budget, often yearly, to use towards business-related training and development programs

    • Home-office allowance: Give your team some budget (recurring or one-time) to use towards cost they incur for setting up and maintaining their home office. Could also be applied for a membership in a co-working space.

    • Travel allowance: Pay your team some flat fee for their daily commute etc.

There are many more forms of allowances. The difference to classical reimbursements is that allowances are more targeted. If you provide someone a training budget of EUR 1,000 per year, this implies the expectation that they continuously learn and get better.

By nature, allowances ideally are tax-free, but it depends on the local tax regulations which allowances qualify.

Long term performance incentives

Next to the rather short-term, cash based compensation components, there are other, more long-term options. They usually come with a higher commitment and are more closely tied to the company success rather than the employee’s performance.


One of the most common tools these days are employee stock option plans (ESOP for short). As a part of the compensation, the employee receives the option to purchase shares of the company at a favorable rate.

They can execute the option at a later, more favorable time, e.g. when there’s a liquidity event (IPO or dividends paid).

Owning parts of the company is meant to make employees act like owners.

Usually these option plans come with vesting periods, another long-term incentive. A common vesting schedule can look like this:


    • The option to buy shares at a price X are granted to day.

    • The options are vesting 25% per year for the next four years, and there’s a 10-year limit.

    • This means that you can exercise 25% of the options after one year, 50% after two years, 75% after three years and 100% after four years. You then have another 6 years time to exercise the option (10 years total). After that time, you lose the right to execute the option.


Ghost shares or phantom stock are a contractual agreement that mimics the behavior of an actual equity deal. For example, this could be in form of a contract that puts you in a position as if you had shares.

Or you could have phantom stock that mimics the behavior of an ESOP.

The main advantage is that you save on legal, tax and filing cost as you’re not actually changing the equity structure of the company. You just have a simple contract between company and employee.


Especially for senior management, you might consider profit or revenue share deals. Often, there are conditions tied to these deals:


    • A senior executive receives a certain percentage of profit beyond a threshold or generated by a specific source

    • Often these agreements are capped

While these deals represent a very direct incentive to attract or hold top talent for senior positions, they’re complex to draft. It’s often difficult to foreseen which 2nd or 3rd-level consequences you produce.

It is important to test these deals in a scenario analysis to see how they perform when the business develops strongly or not great.


Partnership models are often found in professional services such as consultant, tax accounting or law firms.

They provide a structured path for high-profile employees to become co-owners of the company.

Entering a partnership is usually tied to some form of assessment and approval by existing partners as well as a cash-investment.

Design, Strategy and Finance

Now that we’ve discussed all potential components, it’s time to go back to the drawing board. You now have to put together your individual compensation package.


In today’s competitive market for employees, it makes sense to think about your compensation in terms of a total rewards strategy. It summarizes all compensation and rewards components an employee receives when working for you.

They will be cash and non-cash, as well as some components that don’t have to do with your compensation system.

Examples for the latter are:


    • learning and development opportunities in the company

    • the chance to work or live abroad or

    • the opportunity to work with industry leaders.

Think about total rewards like everything the employee gets out of the relationship. And then design your compensation system to fit this picture.


Out of all the exciting options you have, compile the ones that best suit you strategy.

If you’re operating under a low-cost strategy in a high-turnover market, then don’t invest into long-term incentives as this will damage your strategic advantage.

If you’re looking to build a team with an ownership culture that grows the company with you long term, a mediocre fixed salary with some discretionary cash-bonus will probably not produce the commitment and retention that you need.

So, first, get clear on your strategic goals. Then design your compensation strategy to support that.


And of course, when thinking about compensation, we have to look at the numbers. When you decide on compensation structure and amount, always consider two things:


    • Cashflow: Can the company’s cashflow comfortably afford all payments related to the compensation plan? If you pay out all yearly bonuses in April and the first quarter is weak in terms of cashflow, you might run into issues. Also, think through if you can really afford that high-profile executive.

    • ROI: Next to all cash constraints, try to always have an eye on the ROI, long-term. Investing into a compensation plan today will have effects on who’s on your team, how motivated they are and what goals they pursue. ROI can be very immediate and cash-based, e.g. when changing bonus structure for the sales team. Or it is very long-term and non-cash in nature, like optimizing your compensation for internal equity.

Lastly, the recommendation is simple:


    • Get clear on what you want to achieve

    • Pick your options out of the above

    • Write them down

    • Think through 2nd or 3rd level consequences

    • Make sure cashflow works and ROI is positive

And then implement it.



Table of Contents

Let’s talk

We are a remote-first consulting firm – no matter where you are, we would love to hear about your company. And how we can help you become even more successful.

Send us a Message! 📫

Please enable JavaScript in your browser to complete this form.
Asamby Consulting

Asamby is an award-winning operations consultancy for service and tech businesses. We help you build scalable operations, an efficient organization and excellent strategy execution. For less pain and more profit.


© 2024 Asamby Consulting

Designed and developed by Power Funnels 

New Year
New Operations

Join our free 3-Day Online Event to make 2024 your best year yet. Jan 16 – 18 2024

Free 1:1 Consulting Session for the first 10 Registrants!

This is a staging enviroment