It’s Time to Bench Lame Benchmarking
In my latest book, Never Ask for the Sale, I wrote about some ways of pricing that leave the seller in a poor position. I cast shade on billing by the hour and parsing a pricing proposal by its separate elements when the real value comes in the elements in aggregate.
I recently realized there is a type of pricing analysis I want to add to the list of “watch outs.” It’s benchmarking. Now benchmarking sounds reasonable. You are applying for a job as a Senior X. It probably makes sense for a company to do some benchmarking on comp packages for a Senior X in your geography with comparable experience. Ok. Fine. But benchmarking fails when it does not take into account unique circumstances of a specific situation.
Good benchmarking has sensitivity for context. Bad benchmarking is milquetoast, and if someone to whom you’re selling (a product, a service, or you as a candidate for a new role) is using bad benchmarking, it’s on you to bring this up. It is definitely on you if you’re using lame benchmarking to suss out your own pricing or comp.
Real-life example 1: Bob is being recruited to join a new startup focused on a very specific scientific hypothesis. The two cofounders have a hunch around the hypothesis, but they have no experience in the science itself. I mean zero. Nada. Bob is deep in science. He has spun up some side hustles around the science to monetize his knowledge in creative ways. As they are negotiating Bob’s comp package, the cofounders ask Bob to send a picture so they can showcase Bob on the team page in their pitch deck. Bob is a relative newbie to the startup space, so this doesn’t set off any alarm bells. Ah well.
Events unfold to the point where Bob is making a case for better compensation as part of his deal. A mix of salary and equity. Bob looks around and benchmarks what other people coming in at this stage might make in a startup, he does a bunch of long division because he wants to work part time, and he lands at some extremely small numbers. Bob wasn’t unwise to look at benchmarks for comparable new additions to a startup at this stage, but he failed to appreciate that this situation was incredibly unique.
This startup needed Bob far more than a typical startup would need anyone because of the credibility gap in the area of scientific focus. This is why the cofounders wanted to add a prospective part-time future employee to a pitch deck! They knew how critical Bob was to the whole endeavor.
When you are negotiating comp or pricing for anything, specific context matters. Examples include:
- How quickly does someone want something done?
- How unique is the thing they want in the world?
- How much value does the initial tranche of time matter to the buyer such that measuring it out hourly or otherwise per capita makes little sense to the seller/candidate?
So if you’re Bob, take those and other contextual factors into account and tie your suggestion to the value conveyed. Often, based on context, actual value is different than aggregate benchmarks might suggest. As a side note, this argument applies even if you’re responding to a proposed amount of comp or a proposed price for you or your product. For what it’s worth, I always recommend you be in a responsive position (having them name a number first), as opposed to a proposing position, when it comes to situations like this.
Real-life example 2: Bertha has been at a fast-growing startup for a few years, from the very early days to a point of material scale. She started with no direct reports. She now has many. She started so early that equity allocations for team members were not well-defined (or understood), and she got a microscopic allocation. Now the company is five times larger. Bertha has a big team and touches 100% of the revenue. Sadly, Bertha is now undercompensated in equity. She knows that new people coming in at her level are being offered far more equity than she is receiving in the same forward year, in part because Betha’s equity allocation is anchored by the early number received in that first company chapter.
Bertha wants to shed the anchor. She wants to level up and be comped on equity in a way that more closely matches the contribution she has made and continues to make at the company.
Bertha goes out and does some benchmarking on what a typical person at her level would earn in equity at a startup of the current size in her departmental area. Yikes. Bertha…noooooooo.
Why not?
Because there is specific context here. Bertha has been a huge part of the increase in revenue in the time she’s been at the company. She has built a wealth of knowledge on the company, the space, the customers, and the strategic outlook. So Bertha should not be benchmarking herself against a new person coming in at her level and function. Her value is far higher than that. The fact that her company hasn’t stayed up to speed on this with Bertha is an issue. Sure. But now that Bertha is in the seat of having to make an argument (golly, company, how could you be giving more equity to new people at Bertha’s level if you still love Bertha in her seat?), she can’t use this sub-par benchmarking approach.
I’ve used examples of someone “pricing” as the “seller” in two employment contexts, but these concepts apply in almost any sales situation: solopreneur services, software product, etc. The value of the thing being “purchased” isn’t always fungible, so benchmarking should either be very dialed in or considered only as a part of the equation.
Frankly, neither Bob nor Bertha should have been in this situation. Great “buyers” of talent stay current with value and compensate accordingly. Lest the Bobs and Berthas of the world find greener pastures elsewhere.
Any thoughts, feelings, or blurts? Share them here.