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5 steps to building an effective engineering compensation plan
Hiring freezes and layoffs are on the rise. To keep your software engineering teams productive, build a compensation plan that makes every hire count.
After a year of unprecedented funding and growth in 2021, tech is dialing back. Many companies are still hiring and increasing software engineer salaries. However, reports of hiring freezes and layoffs are on the rise.
As an engineering manager navigating market uncertainty, your role is to maintain productive teams without wasting resources. That makes it all the more important for you to hire and retain the right people. One of the best ways you can do this is by developing an effective engineering compensation plan.
An engineering compensation plan helps you determine the following:
- Starting salaries for new hires
- Salary bands
- Criteria for salary adjustments
Effective compensation plans help you recruit great candidates with competitive offers. They also help you retain engineers by creating a fair and transparent career ladder.
Compensation plans are a collaborative effort between you, HR, and executive leadership. However, you will play a significant role in shaping them. Knowing how to build an effective engineering compensation plan will make you a better advocate for your team.
Today we'll cover 5 steps to building a compensation plan that will keep your team agile amid the tech slowdown.
- Conduct market research
- Align your strategy with company values
- Define total compensation and adjustment plans
- Communicate your plan throughout the employee lifecycle
- Revisit your plan annually
1. Conduct market research
To build a compensation plan that works for your company, start by researching current software engineer salary trends. How do similar-sized companies compensate their software developers?
According to the 2022 State of Software Engineers report from Hired, remote software engineer jobs have continued to increase – and they tend to pay more. This competitive market has driven small startups and mid-market businesses to level up their software engineer salaries and benefits. As a result, the average base salaries at small and mid-market businesses are now on par with those at enterprises.
2021 average software engineering salary by company size
- Small businesses: $155,423 (1.7% increase from 2020)
- Mid-market businesses: $158,241 (0.6% increase from 2020)
- Enterprises: $155,015 (0% increase from 2020)
The shift towards remote work has contributed to higher average salaries for software developers, especially in smaller regions outside the New York and San Francisco markets. The San Francisco Bay Area continues to pay the highest average software engineer salary, but the Seattle, Austin, and Chicago markets have experienced notable growth.
2021 average software engineering salary by market
San Francisco Bay Area
- Local: $170,000 (2% increase from 2020)
- Remote: $168,000 (5% increase from 2020)
- Local: $151,000 (1% decrease from 2020)
- Remote: $152,000 (4% increase from 2020)
- Local: $162,000 (7% increase from 2020)
- Remote: $162,000 (8% increase from 2020)
- Local: $142,000 (7% increase from 2020)
- Remote: $150,000 (8% increase from 2020)
- Local: $129,000 (5% increase from 2020)
- Remote: $143,000 (8% increase from 2020)
In addition to driving growth in average salary, remote work has also led many candidates to redefine their expectations for the workplace. According to a 2022 survey from Bankrate, American job seekers prioritize the following in prospective employers:
- Higher annual salary (52%)
- Flexible working hours (43%)
- Ability to work remotely (34%)
- Paid time off (29%)
- More fulfilling work (28%)
Understanding these trends is a key step in building your compensation plan. It enables you to make informed choices that balance your company's needs with employee expectations.
2. Align your strategy with company values
Real-time market data and the resources available to your team will be huge factors in determining compensation. However, this still leaves you with dozens of decisions to make about base pay, benefits, and growth opportunities.
Before committing to numbers, take a step back and consider your company values. Like any element of company culture, your compensation plan is a reflection of what matters to your organization. Use company values to help guide compensation decisions.
For example, let's say your organization values health and wellness. You can align your compensation plan with these values by providing flexible PTO options or wellness stipends. Organizations that value innovation might create opportunities to reward employees for helping develop new ideas.
When you use company values to guide compensation strategy, you can more effectively justify your offerings to candidates and employees. This will help you to build trust with candidates during the hiring process and with your engineers throughout their tenure.
3. Define total compensation and adjustment plans
Once you've established the market data and values that will guide your engineering compensation plan, it's time to define total compensation for the roles you need and adjustment plans across the board.
Total compensation encompasses the monetary and non-monetary value engineers receive from your company. This includes:
- Base salary
- Additional cash compensation, such as bonuses
- Healthcare benefits, training, and wellness programs
- PTO and work-life flexibility
While yearly salary is part of what makes a compensation plan competitive, it's not the whole story. For instance, if your small startup can't provide 90th percentile compensation, let your values dictate the additional cash compensation and benefits you might offer.
The next step is to create adjustment plans for your engineers. Ask yourself the following:
- What does the career ladder look like for software engineers?
- What does compensation look like at each step of the career ladder?
- What are the criteria for moving up the career ladder?
These questions will help you to create levels within different job categories. They will also help you to set salary bands, which refer to the salary ranges for specific job titles. The following factors will influence your salary bands:
- Role expectations
- Years of experience
- Geographical location and cost of living
Well-defined salary bands ensure that your company can plan for growth and that engineering compensation is adjusted fairly across your teams.
In an ideal world, salary bands are in place before you interview candidates so that you can make thoughtful offers as part of a larger strategy. In practice, startups often have dozens of employees before defining a compensation plan. This means that there may be inconsistencies in how software development engineers are compensated.
Some junior software engineers may be overcompensated relative to your new salary bands; some senior software engineers may be overdue for a raise. As an EM, your role is to work with leadership to develop adjustment plans that address these discrepancies.
bethanye McKinney Blount, CEO and co-founder of the compensation organizing platform Compaas, suggests focusing on undercompensated engineers. These are often senior software engineers who joined the company early with a low annual salary. While it can be costly to align their compensation with your new salary bands, consider whether losing these engineers will cost the company more. Communicate with your CFO about these tradeoffs.
If you're able to give undercompensated engineers a boost, be sure to manage their expectations around future adjustments. For example, if an engineer receives a 15% raise to rectify a discrepancy, they might expect to receive a comparable raise the following year. Explain the reasoning behind the adjustment and communicate what future compensation growth might look like.
4. Communicate your plan throughout the employee lifecycle
When implemented effectively, engineering compensation plans help you to build and retain high-performing teams. To unlock the full benefit of your compensation plan, make sure that engineers know what to expect at every stage of their tenure.
Pay transparency is crucial to attracting the right candidates during the hiring process. With so many remote software engineer jobs available, developers have little reason to consider companies that don't communicate salary ranges and growth opportunities. In addition, the rise in state mandates is driving a cultural shift towards pay transparency.
Even if you have a thoughtful compensation plan, failing to communicate it clearly can lead to misaligned expectations. The last thing you want is to find a great candidate and lose them with a disappointing offer. This wastes your resources and contributes to a negative perception of your company.
Misaligned expectations can also damage trust with new hires and more tenured software engineers. If you don't provide clear guidance on how their careers might grow, employees will make assumptions and feel devalued if they don't progress as they'd hoped. This can cause low motivation and high turnover on your team.
To keep engineers productive and eager to grow with your company, be transparent about your compensation plan. This doesn't mean distributing the salary range for every role at the company. It means regularly talking with engineers about their career goals and outlining a clear, achievable path to advancement.
5. Revisit your plan annually
Remote work has caused dramatic shifts in the software engineering landscape. Recent slowdowns and hiring freezes suggest that even more changes lie ahead. The most effective compensation plans consistently evolve to reflect these circumstances.
To keep hiring efficient and make every hire count, revisit your compensation plan annually. Work with leadership to assess the following:
- New market data on software engineer salary
- Resources available to your company
- Company and team goals
- Employee preferences
Use this information to revise your compensation plan and ensure that it remains competitive. When engineers see that you are willing to adapt to industry shifts and employee needs, they will feel more valued and motivated.
At the same time, drastically altering your compensation plan each year is unsustainable and communicates a lack of cohesion in company culture. Take new information into account, but make pragmatic adaptations grounded in company values.
You'll never create a plan that satisfies 100% of engineers all the time. However, you can maintain trust by aligning your compensation decisions with company culture and clearly communicating them to your engineers. This alignment and transparency will help you to futureproof your teams against market uncertainty.