Fair Offer, Part III: Beyond Base Salary

How to combine Base Salary, Bonus, and Equity — to design comprehensive compensation bands & make compelling offers.

Apr 15, 2025

Fair Offer, Part III: Beyond Base Salary

Contents

Refresher: an algorithmic approach to comp Set Base Salary based on a consistent progression Set target bonuses Other compensation: aka Skin in the Game (“SIG”)How to calculate and communicate equity compensation Step 1: Calculate the Annualized Target Equity Value in dollars, same as above Step 2: Find or Calculate the “target value / share”Step 3: Translate into Shares Cheat Sheet to design compensation bands (base, bonus, and equity)

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It might be useful to check out the context from prior parts below, but I’ve summarized a few key bullets in the “Refresher” section, so that this post can stand alone.
Part I
Part II

Refresher: an algorithmic approach to comp

All too often, companies design their compensation bands by only using survey data — to “snipe” compensation for every role in every job family, one by one.

Take someone designing compensation — it could be Total Rewards / People Ops, or a Finance / Biz Ops person, or even a VP figuring out how to compensate their team. They start with extremely messy “survey data,” which has been ostensibly parsed and cleaned by the survey data provider; but is usually

full of gaps and inconsistencies (e.g., a Director getting paid more than a Sr. Director!)

has a low sample size for most roles

and has a very wide range with overlapping bands (especially outside of major metros)

requires dozens of hours of work to triangulate compensation bands for each title, from these scattered and contradictory data points

and of course, data on non-base salary (bonus, commission, or equity) is virtually non-existent

Some data sets are better than others — e.g., Pave has more data than most, and Carta tends to do equity quite well. But all “comp surveys” fundamentally suffer from this issue due to methodological constraints.

So when you want to set Staff Engineer comp at a Series B company in Memphis, you get a “🤷 Not Enough Sample Size”… or worse, misleading data points.

We think this is backwards. Your bands should be set based on a compensation philosophy / framework, but informed by benchmarks.

What we do think is useful, is a data science approach, which accounts for each factor. E.g., let’s say

L6 vs. L5 is a progression of 117% in base salary

zone 1 vs. zone 4 is a 20% cost of living delta

and a L5 Sr. Software Engineer at Series B in NYC is $165,000

Then:

→ an L6 Staff Engineer at Series B in NYC is $193,000

→ an L6 Staff Engineer at Series B in Memphis is $154,000

💥

This approach is essential to ensure internal consistency, fairness, and equitability. This is what Fair Offer does.

In Part II we discussed…

Determining the “entry-level” salary tied to minimum exempt compensation

How to plot levels for each Job Family

The idea of a fixed progression or multiplier across levels for total comp

A single, simple formula to estimate total compensation

In Part III, we’ll discuss…

how to take the same “progression” approach to setting base salary

norms for bonus across levels

calculating equity / profit share / other “skin in the game”

Set Base Salary based on a consistent progression

We found that it’s important that there is a consistent progression (say, 20%) between each level — not 7% or 30%:

it’s a simple, consistent approach that’s easy to explain to employees

avoids overlapping bands (to be avoided for fairness and unbiased comp)

no too-small or too-big jumps between levels — e.g., you don’t want one level promotion to result in a $2K bump but another to result in $20K

This is why Fair Offer takes as given that there should be a fixed progression between levels. In other words, if L5 makes 18% more base salary than L4, then the base salary for L6 should be roughly 18% higher than L5’s.

From our analysis, the Base Salary progression between levels tends to range between 15% and 20%. A good rule of thumb:

This has to be done with nuance; e.g., if you were to take investment banking, the jumps look a lot bigger (e.g., 40-50% not 20%) but this is really because they effectively combine levels because they’re much more aggressive about up-or-out — so getting from a first year associate to a third year associate at a bank is effectively a promotion even if your title is the same.

Set target bonuses

Bonuses tend to be one of the simpler elements of compensation. Not every company pays bonuses; but every one that does, ends up following similar pattern. It’s normal to not have a different bonus percent for every level, but rather have it change every ~2 levels. Here’s a starting point for bonus that might help:

Unsurprisingly, the range of possible bonuses vary more as you get higher up the chain, and it’s dictated by the company’s performance-orientation (modest vs. aggressive).

The range is meant to illustrate both the variance by company due to culture, and target vs. top performer bonuses; e.g., the top end of this range of 80% for a Director might be for a 5-rating, while the 40% is for a 3/4-rating. It’s common for underperformers to get nominal or no bonuses.

Many companies have a company component and personal component. The above figures are meant to illustrate a business-as-usual scenario. When the company component is lowered because the company had a bad year and the bonus pool is underfunded, it gets extremely situation-dependent. Then, the appropriate bonuses are more a function of hard financial constraints balanced against the need for retention, rather than any sort of comp philosophy consideration. So, we don’t go into that here.

Other compensation: aka Skin in the Game (“SIG”)

Besides base salary and bonus, there’s a last component to total compensation: usually some form of “skin in the game” (or SIG) compensation. This is dictated by how ownership-oriented the company is, but can take many shapes

Startups and tech companies tend to skew high on equity

Professional services tend to only give any ownership to partners

PE-backed run companies do profit-share, or profit-participation units not equity

Others do bonuses that are tied to company performance which is effectively profit-sharing, even if they don’t call it that

Whatever shape it takes, a lot of companies pay salaried, exempt workers some sort of SIG compensation.

That said — many businesses don’t do any skin in the game at all (even if they’re massive and have 10k+ employees); this is simply a choice, all of which interplays with the sort of culture and talent they’re seeking to attract and retain.

✌️

We think it’s best to make an offer with only Base Salary and Total Compensation — 2 headline numbers — because:

a) candidates find this easiest to digest

b) elite candidates often have multiple offers; this enables an apples-to-apples comparison

Then, the (additional) aspects of Total Compensation can be broken down into

If applicable, a reasonably standard bonus structure

The annualized value of any SIG compensation (profit share, equity, etc.)

Since the headline numbers are Base Salary and Total Compensation, it’s better to treat Total Compensation as the top-down driver; SIG fills the gap after base and bonus.

So SIG should be derived from Total Compensation, not the other way around:

$annualSIG = $totalCompensation — $baseSalary — $targetBonus

How to calculate and communicate equity compensation

We often see people trying to estimate the right amount of SIG compensation independently (how many shares should a VP Marketing get at a Series C company?).

If your chosen mode of SIG compensation is equity (whether Restricted Stock, Options, or RSUs), it is a cardinal sin to look up benchmarks that are only denominated in number of shares.

📜

A share is not a share is not a share. A share of stock at Robinhood is $40 and Meta is $550. When you’re comparing offers, is 10,000 shares from Robinhood the same as 10,000 shares from Meta? Obviously not. Private companies work the same way.

Percentages of a company are slightly better, but even that is problematic (0.1% of a series B company is not the same as 0.1% of a seed stage company).

💲

The only way to standardize and normalize equity grants is to translate equity into currency (dollars or otherwise) in a reasonable way → add that into Total Compensation.

This can get complicated — and this is the reason equity compensation is so poorly understood and communicated. But here are 3 simple steps to translate equity into compensation (and, as a candidate, to understand how the best companies do it, so that you can expect the same for your offer).

Step 1: Determine “Target Equity Value” (in $ / year)

Step 2: Find “Target Value / Share”

Step 3: Convert into Shares according to the vesting schedule

Step 1: Calculate the Annualized Target Equity Value in dollars, same as above

$annualTargetEquityValue = $totalCompensation — $baseSalary — $targetBonus

Step 2: Find or Calculate the “target value / share”

For RSUs, this is just the fair market value of each unit — which typically converges on a) public market share price for listed companies and b) 409a valuation for private companies.

For Options, this is more complicated.

The 409a at the time of the grant is used to set the strike price (i.e., what employees pay to purchase the stock); so it would be exactly incorrect to consider that figure to be compensation of any sort. If anything, it’s the opposite.
Instead, a standard practice is for a company to calculate the “spread” between the preferred price and the 409a valuation, as the “target price per share”.
While this is not compensation, strictly speaking, it’s an illustration of what the equity grant could be worth if the company were to exit today, at the most recent headline valuation.
The finance / legal team might sometimes determine a target price per share to be used in total comp calculations, which is different due to various factors (market conditions, time / growth since last funding round)

For Restricted Stock (which is only a form of equity granted very very early on — usually earlier a seed round), it’s a bit simpler; it’s normal to consider simply the preferred price to be the “target price per share” because the 409a effectively rounds to $0 at a company so early in the journey.

We uniformly refer to this as “target value” and not simply “value,” since the figure doesn’t always match “fair market” value which is a legal / tax definition.

Step 3: Translate into Shares

Finally, combine these inputs with the vesting schedule to determine the number of shares to be granted:

numShares = ($targetAnnualEquity * vestingDuration) / $targetPricePerShare

Let’s say Target Equity Value is $40,000 / year for a given candidate, and the Target Price / Share is $5.00.

Assuming there’s a vesting schedule (say, a standard 4-year vest), then this figure should be multiplied accordingly to calculate the offered number of shares.

$40K / year in target equity value ÷ $5/share = 8,000 shares / year

Multiply by a 4-year vest = 32,000 shares

Note: These calculations assume no refreshers or performance triggers — those should be layered after setting baseline equity compensation.

Cheat Sheet to design compensation bands (base, bonus, and equity)

Identify reasonable benchmarks for a single key role within each job family: pick one where there’s lots of data, typically in the middle of the leveling guide (e.g., ~L4-L6 — Sr. Software Engineer, Sr. Product Manager, Marketing Manager, Sr. Account Executive, Operations Manager, etc.).

Extrapolate base salary across levels: multiply or divide using your progression factor (e.g., 1.16–1.20 between levels)

Gut check against benchmarks and internal expectations

Set target bonuses for each level: apply reasonable bonus multipliers (consult the table below if helpful)

Derive Target Equity Value / year for each level from Total Comp, Base, and Bonus: