Employee compensation: A founder's guide to compensation packages

What is employee compensation?

Employee compensation is the total value an employee receives in exchange for their work, time, or services. This includes their salary, benefits, and bonuses—and for a startup, the most important component: equity. It represents the full value an employee receives, encompassing immediate cash, long-term incentives, and non-monetary benefits that align with your company's goals. While it sounds simple enough, compensation quickly becomes complicated. Getting compensation wrong or failing to properly invest in your employees can be the difference between a thriving company and a failed startup.

In the broader private sector, the split between wages and benefits shows that benefits make up a significant portion of an employee's total compensation package, reinforcing the need to present a complete offering. While equity has historically been a primary lever for attracting top talent, the compensation equation is changing. In today's uncertain economy, many employees want cash for its immediate security, and companies have responded; the average new equity package for new hires shrank 37% between November 2022 and January 2024, and equity grant sizes have remained at that reduced level ever since.

However, cash benefits alone cannot replicate the unique potential of ownership. For many top candidates, the allure of the 10x return remains a powerful motivator, offering a chance at life-changing wealth that a salary cannot match. So while cash is critical for short-term security, a well-structured equity offer remains a vital differentiator for startups aiming to attract talent with a long-term, owner's mindset.

As a founder, you're offering an opportunity to be part of a mission. A well-structured compensation package that leverages equity is how you tell that story. It’s how you find the people who are willing to take a risk because they believe in the future you're building together.

Knowing the different types of compensation, the various ways to structure it, and developing a strong plan isn’t limited to the human resources department. Figuring out compensation should be on the top of every founder’s to-do list. In this article, we’ll guide you through the basics of employee compensation.

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Types of compensation

A compelling compensation package is made up of a few key parts including base salary, bonuses, equity, and benefits. Understanding how these elements fit together allows you to create a package that is both competitive and sustainable for your startup's stage of growth. A well-structured package thoughtfully balances an employee's need for immediate financial stability with the long-term upside that makes joining a startup so exciting.

Below is a high-level overview of the four main components and their purpose.

• Salary: This is the most straightforward part of the compensation package. It covers an employee's predictable base pay.

• Bonus: This includes variable compensation like performance-based bonuses and other incentives.

• Equity: This is a share of ownership in the company, typically offered to employees in the form of stock options or restricted stock. Equity gives employees a stake in the company's future success and offers the greatest potential for a significant financial reward down the line.

• Benefits: These are the non-cash perks that support an employee's health and well-being. Common benefits include health insurance, paid leave, and retirement plans like a 401(k).

Direct compensation vs. total rewards

Direct compensation is strictly salary, bonuses, and equity. Total rewards encompasses compensation plus benefits. (You may hear total rewards described as total compensation, but since benefits aren’t strictly compensation, that’s less accurate.)

Direct compensation

Here are some considerations to keep in mind when determining direct compensation:

Base pay

Base pay or base salary is the fixed, reliable income an employee receives, typically paid on a regular schedule. This is the foundation of any compensation package, providing the financial security that allows your team to focus on building a great company without worrying about their basic needs. It must be competitive enough to cover an employee's living expenses and feel fair for their job leveling and experience.

Overtime pay is additional pay that is part of an employee’s salary and is considered regular income. It’s typically reserved for non-exempt employees who earn an hourly wage and work more than 40 hours per week (or other hourly standards set by the company or by law).

Salaries can be standard regardless of location or can be based on an employee’s specific region. For example, to stay competitive in local markets you may choose to pay employees in San Francisco, California, more than employees in Raleigh, North Carolina, based on the cost of labor. That’s where competitor and market research comes in handy.

Picking a salary number out of thin air is a common and costly mistake when determining how much should startups pay their first employees.

To avoid this, companies must move away from guesswork and use data to inform their decisions. It's important to use reliable, real-time data to benchmark salaries against the market for similar roles at companies of a similar stage and size. This data-driven approach ensures your offers align with salary bands to attract the right candidates without overspending your limited cash reserves, helping you make responsible financial decisions for the long-term health of your startup.

Variable pay (bonuses and commission)

Variable compensation is a payment that is typically performance-based and therefore is subject to change between payout periods. An annual company bonus or a sales commission are examples of variable compensation given to employees on top of a base salary. This part of the pay package is designed to incentivize and reward specific achievements, driving behaviors that directly contribute to the company's growth. It can be an effective tool for focusing the team on key milestones, but it requires careful planning to be effective.

As Hannah Wells of White & Gale Consulting explains during Carta’s Startup Compensation in 2024 webinar: “So often you see people do bonuses early on, and then either it's completely a low ball target that is just met, or it's so far off that it's demotivating and demoralizing. Now you create this cycle where now people expect to see the bonus paid out in full every time.”

To avoid these pitfalls, it's important to structure variable pay thoughtfully. Here are the two most common types for startups:

• Performance bonuses: These are typically tied to achieving specific, measurable goals. For early-stage startups, tying bonuses to company-wide milestones is an effective way to ensure the entire team is pulling in the same direction.

• Commissions: This form of incentive-based compensation is standard for sales roles. It is directly tied to the revenue an employee generates, creating a clear and powerful link between their individual effort and their earnings.

Equity

For startups competing with large, established companies for talent, offering equity as part of a compensation package is a key advantage. Equity allows you to offer ownership and a stake in the company's future success, something bigger corporations often cannot match in a meaningful way. The potential for a significant financial outcome remains a major allure for tech talent—especially as median startup valuations reached decade highs in 2025—making broad-based ownership an effective tool for attracting the best candidates.

Stock options and restricted stock units (RSU) are two common equity structures. Details of equity—including the type of equity being granted and any applicable vesting schedules—should be provided to an employee as part of a job offer. Vesting is the timing of when an employee actually earns the equity granted to them.

Total rewards (Indirect compensation)

Employee retention generally comes down to more than just compensation. It often takes into account benefits, development opportunities, and company culture, all of which fit nicely into a holistic total rewards approach. Those benefits, also known as indirect compensation, can include a wide range of perks, depending on your company’s philosophy and overall mission.

Employee benefits packages

A strong employee benefits package shows job seekers you care about their well-being, mental health, career growth, and work-life balance. Health benefits, vacation days, retirement contributions, career development opportunities, and other benefits are an essential part of your overall offer that demonstrates your commitment to supporting your team as people, not just as employees. This support system is essential for building a healthy and sustainable workplace culture where people can do their best work.

Employee benefits packages are flexible and dependent on a company’s overall philosophy. Examples of these benefits include:

• Medical insurance (healthcare)

• Dental insurance and vision coverage

• Retirement savings benefits (401K contributions)

• Workers’ compensation

• Wellness programs (such as gym membership reimbursement)

• Educational incentives or continuous-learning stipends

• Well-being benefits (coaching, meditation, therapy)

• Professional development opportunities

• Volunteer opportunities

• Student loan and tuition reimbursement

• Flexible spending accounts (FSA)

• Flexible schedules and work opportunities (hybrid or remote work)

• Paid time off (PTO), sick leave, and paid holidays

• Life insurance and disability insurance (DI)

• Company equipment (such as a laptop)

• Parental leave

• Reimbursement for childcare expenses

• Relocation stipends or housing options

• Reimbursement for work-from-home costs

• Commuter benefits

Each company is different and some leaders choose to prioritize direct compensation over benefits.

How to build a competitive compensation package

This section provides a step-by-step process for creating a thoughtful and strategic employee compensation plan, moving beyond just picking numbers to designing a coherent compensation strategy that supports your company's growth.

Step 1: Define your compensation philosophy

Creating or updating any compensation program starts with a clear compensation philosophy. It’s a set of guiding principles that ensures you make consistent and fair compensation decisions as you grow, helping you articulate your approach to rewarding your team. A compensation philosophy is your company’s overall position on employee compensation—for example, prioritizing direct compensation over total rewards, adhering to strict compensation guidelines, or going the extra mile for the right employee. Aligning your compensation philosophy with your business strategy can help you hire, retain, and reward top talent.

Step 2: Benchmark salary and equity with real-time data

One of a founder's biggest fears is not knowing what a competitive offer looks like. Relying on outdated, generic salary surveys that don't reflect the fast-moving startup market is a significant risk that can lead to losing candidates or overpaying. The compensation market changes quickly and varies by role.

Using a year-old, one-size-fits-all benchmark in this environment means you risk underbidding for in-demand sales talent and overpaying for marketing hires. To make data-driven, defensible offers, you need access to real-time compensation data from companies at a similar stage.

This is where a dedicated tool becomes invaluable. The team at Lightning AI, a platform for building machine learning models, using total compensation management software ensures it is making competitive and transparent offers. By leveraging real-time data from other venture-backed startups, they can confidently benchmark both salary and equity, helping them attract top talent in a competitive field without guessing.

Step 3: Design your equity plan to attract owners, not just employees

A strong equity plan is about more than just granting a certain number of options. It involves strategically setting up an option pool and determining vesting schedules—which typically follow a four-year vesting period—that encourage long-term commitment from your team. This is how you signal that you're looking for partners in your journey, not just employees who clock in and out.

It's important to get this right from the start. Work with your law firm to establish your equity incentive plan and use a platform like Carta to issue electronic securities and manage your cap table from day one. This professional approach helps you avoid the spreadsheet chaos that leads to costly errors and ensures you are always organized with equity management software to be investor-ready for your next fundraising round.

Step 4: Create the offer and communicate its total value

When you're ready to make an offer, don't just send an offer with a salary number. To truly convey the value you're offering, you need to show the whole picture. A total rewards statement is a professional way to illustrate the full value of an offer, addressing a significant need for clarity in compensation.

This clarity is key to helping candidates understand the long-term opportunity of joining your startup. For example, the team at Dynasty, an online trust management platform, found that clearly communicating the total value of their offers helped them build a strong, motivated team from the start. Using a startup equity calculator that visualizes the potential upside of equity makes the offer more tangible and compelling, helping you close top candidates.

Step 5: Regularly review your compensation

Regularly reviewing your comp plan based on factors like the market value of specific roles and inflation will help you to stick to your compensation philosophy, hire quickly and successfully, reduce employee attrition, and address pay equity gaps.

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Compensation packages: Terms to know

A compensation package is what you offer or present to employees and candidates, typically in the form of a total compensation or a total rewards statement.

Total compensation statement

A total compensation statement shows employees the full current and future value of their compensation packages. At Carta, we generate Total Rewards Statements for companies on our platform so they can show their employees the value of an entire total rewards package—not just direct compensation. The overall value of working at a company becomes more tangible when you can demonstrate when and how bonuses, pay raises, or vesting occurs. The increased transparency can allow the company to stay competitive in local markets and reduce attrition.

Compensation bands

A compensation band, or salary range, is an upper and lower range of compensation that you would be willing to pay someone in a specific role. Comp bands can be structured in two ways: traditional and broadband.

A traditional salary range is common at larger companies. This structure has smaller differences between the minimum and maximum comp bands, placing more emphasis on promotions. A broadband salary range is much wider and is more common at smaller companies with fewer employees because it allows for more flexibility.

Salary benchmarks

Salary benchmarks are a standard way to measure ‌market rates for given roles. They can be useful in determining whether your employees are being paid competitively for their roles. The type of benchmarks that a company uses should reflect their overall compensation philosophy.

Pay transparency

Setting comp expectations avoids wasting employers’ and candidates’ time during interviews and negotiations. Over the long term, pay transparency can protect against low morale and attrition by showing that employees are paid similarly to their peers. Limiting negotiations to a published range reduces the opportunity for unequal outcomes that may arise unintentionally during hiring, which can guard your company against certain claims of pay discrimination.

Offer letter

An offer letter is a document sent to a prospective employee that officially offers them a role. Offer letters typically include a job description, conditions of employment, and, of course, total rewards details.

Job leveling structure

Job leveling structure is how you define roles and leveling. Also called job architecture, leveling, or job structure, this refers to the hierarchy of roles and levels within your company. Having a clear map of job roles and responsibilities is important for setting accurate compensation levels.

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Employee performance management

The guidelines your company uses for performance evaluations are known as performance management. This helps managers track employees’ work so they can receive ongoing feedback and advance their careers. For employers, performance management provides a framework for determining whether an employee merits an increase in compensation.

Incentive compensation

Incentives like bonuses and equity encourage employee performance and stimulate productivity. Some companies make this a key part of their compensation philosophy, seeing it as a way to attract and retain talent and incentivize employees.

Total Rewards

At Carta, we’re changing the way companies think about compensation. Carta Total Comp is a tool private companies can use to attract and retain employees by leveraging the value of total rewards.

1. Carta Offer Letters show your potential hires their entire rewards package. 

2. Total Rewards Statements show your employees the full value of their compensation and benefits packages.

Carta Total Comp uses the most recent, relevant, and reliable salary and equity data so you can make responsible compensation decisions, stay on budget, and communicate the true value of your compensation packages.

Request a demo of Carta Total Comp to get started.

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Frequently asked questions about employee compensation

After learning the basics of employee compensation, founders often have a few common follow-up questions. This section provides quick, clear answers to help you navigate these important details.

How is employee compensation different for an LLC?

LLCs don't issue stock; instead, they use equity incentive plans to grant membership units or profits interest to their members. The rules for how this equity is structured, vested, and paid out are defined in a custom operating agreement, which can make distributions more complex than for a standard corporation.

How do you create a compensation package for a sales role?

A compensation package for a sales role typically has a lower base salary and a higher variable component, such as a commission. This structure directly ties a salesperson's earnings to the revenue they generate, creating a strong incentive for performance.

How do you explain equity to a candidate?

When explaining equity, use simple analogies that focus on the concept of ownership and the potential for growth as the company succeeds. An equity education program can also help by providing a visual and interactive way to make equity feel more tangible and understandable.

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