Crypto Pay Guide – Compensation Process
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March 8th, 2022

The Crypto Pay Guide is a series of articles that will be authored and released by C3 over the coming weeks. Each article will cover a separate compensation topic, focusing exclusively on full-time employees in web3.

What has the Crypto Pay Guide covered so far?

  1. Objectives & Compensation Risk
  2. Compensation Model

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In our last article, we summarized the compensation model used among web3 organizations, which consists of a base salary and/or a large allocation to token compensation. Just like it had for start-ups, this compensation model will attract talent to the crypto industry as individuals seek significant upside from token compensation. However, the retentive effects from the start-up compensation model may be less translatable for crypto organizations. This is because token compensation is liquid (i.e., tradable) meaningfully earlier than start-up equity and token compensation is subject to shorter vesting periods. Crypto markets are also very volatile, which drives realizable pay volatility (read more here).

The following are potential adjustments to the crypto compensation model to better address pay volatility and ensure retention of employees long-term:

  1. Establish a regular, independent compensation review process using relevant market data (covered in this article)
  2. Provide an appropriate mix of at-risk, variable pay
  3. Implement token granting best practices
  4. Utilize performance tokens

Compensation Process

“Compensation process” refers to the governance mechanisms in place that review an employee’s pay and token ownership levels, as well as the overall design of incentive plans. A compensation process should address the following questions:

  • How often does the organization evaluate an employee’s pay levels and token ownership relative to market? How often does the organization implement changes?
  • Who makes the compensation decisions? Is this a transparent process?
  • Is market data used to benchmark an employee’s pay and ownership?
  • Does the company document its compensation governance process with community members and investors to ensure accountability?

Although these questions may seem mundane or administrative, an established compensation process is critical so communities are heard and employees are fairly compensated, which in turn will promote retention.

We can learn a lot from publicly traded corporations as they have evolved their compensation governance process over decades and are subject to constant regulatory scrutiny. Corporations are managed by executives who are kept in-check by the Board of Directors, which of course represent the interest of shareholders. The following is a generalized compensation process for a publicly traded corporation:

The above compensation process only applies to executive-level  roles (i.e., C-Suite, SVPs, VPs) as they fall under the Board’s purview because of their strategic responsibilities. Most often, the executive’s incentive plan design is extrapolated to lower-level employees, with an expectation that at-risk pay decreases with less strategic oversight.
The above compensation process only applies to executive-level roles (i.e., C-Suite, SVPs, VPs) as they fall under the Board’s purview because of their strategic responsibilities. Most often, the executive’s incentive plan design is extrapolated to lower-level employees, with an expectation that at-risk pay decreases with less strategic oversight.

The above compensation governance process is well-designed because it meets the following four objectives:

  1. Accountability
  2. Independence
  3. Regularity
  4. Fairness

The crypto industry can leverage and improve on such a design, but organizations should walk before they run and ensure the process fits within their current governance structure.

Accountability

It is crucial to have a compensation process with checks and balances so all parties are held accountable for the decisions they make. The compensation process at a publicly-traded corporation establishes a system of accountability. Shareholders elect board members to oversee the decisions made by executives. To hold board members accountable, shareholders review and approve the company’s executive compensation practices via the Annual Proxy Statement.

This system of accountability was created over decades, and we do not expect the crypto industry to establish such a process overnight. As governance structures evolve and DAOs scale, it is important to establish checks and balances wherever possible.

How can accountability be incorporated? Many organizations have elected community members or delegates that serve on a council, similar to a Board of Directors, with the intent of acting on behalf of tokenholders. C3 believes that this group should have oversight over key compensation decisions, such as incentive plan design or the pay levels for protocol leaders. For scalability, we do believe it is important for protocol leaders to have some independence in hiring and determining pay levels for lower-level employees. If an elected council does not exist, communities themselves can hold leaders accountable, although we advise that communities engage independent third-parties for compensation expertise (see “Independence” below).

Additionally, it is important for the protocol to be transparent with their compensation practices so leaders and/or council members are held accountable. We will likely see the prevalence of documents disclosing pay practices to increase, especially as regulators are more active in this space.

Independence

Compensation is a sensitive topic. It is crucial for communities to engage with an independent third-party, like C3. Third-parties can limit emotional decision-making by serving as a middle-man between protocol leaders and communities. Also, independent third-parties are experts that can advise protocols on complex compensation issues that may be outside the scope for most leaders.

Most protocols do not have HR professionals in-house that have the capability to review compensation levels. Even if HR professionals are hired, they are not independent. Protocol leaders should not be proposing their own pay adjustments and putting it up for a community vote as this can cause backlash.

Regularity

A compensation process needs to have a regular cadence. Corporations conduct their process annually. Crypto organizations should guarantee compensation decisions at least once per year, although, given the fierce crypto talent market, compensation can be evaluated semi-annually or quarterly to foster market alignment.

Frequent market review confirms that employees’ pay and ownership is aligned with the market, which in turn promotes retention. A frequent and regular compensation process also creates a nimble organization that can quickly respond to exogenous talent factors. For example, during bear markets, employees may see the value of their compensation drop substantially. Having an established and frequent compensation process allows the organization to consider a response under normal cadence, without approaching the community with one-time proposals.

Fairness

A fair process requires the use of market data to benchmark pay levels and ownership. As an industry, we must move away from crafting offers based on what “seems right” or what we have read on Twitter. Instead, we must rely on appropriate and defendable compensation data.

Ideally, this compensation data would come from independent third-party sources that focus on the crypto industry. However, a crypto-specific resource does not yet exist (although C3 intends to develop a robust source through our client work). Until a crypto-specific source is created, we must rely on traditional resources when crafting offers or evaluating pay levels, such as:

  1. Compensation at prior role, assuming it is reasonable.
  2. Compensation for a similar job at a traditional technology company or start-up.

Benchmarking against relevant compensation data promotes fairness. The employee is fairly compensated for their role, which nurtures retention, and the organization and community are certain they are spending an appropriate amount on talent.

In Conclusion

Retention is frequently addressed via adjustments to compensation levels or incentive design, thus organizations often overlook the retentive power of having a well-designed compensation review process. A robust compensation process should address accountability, independence, regularity, and fairness, which in turn will promote employee retention. This can be the first step for many web3 organizations as they continue to evolve their governance structure.

Of course, this is not the only approach a web3 organization can take to improve retention long-term. The following additional measures will be covered in future installments of the Crypto Pay Guide:

  1. Provide an appropriate mix of at-risk, variable pay
  2. Token Granting Best Practices & Vesting
  3. Performance Tokens

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The Crypto Pay Guide is a series of articles that will be authored and released by C3 over the coming weeks. C3 is the world’s first Crypto Compensation Consulting group.

We advise crypto organizations and communities on compensation levels, incentive design, and governance practices. We have experience advising both large public corporations and small technology start-ups.

Please read more about our firm and services on our website. If you are a leader, investor, or community member who would like to work with us, please contact us at info@c3.email or via Twitter.

Follow us to stay up to date on future installments of the Crypto Pay Guide!

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