Avoid the Telephone Game as You Scale (using basic org design principles)

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There are three commonly used factors used to redesign and optimize org structures: bands, spans, and layers.

  • Bands: tiers of pay for employees of varying seniority.

  • Spans: number of direct reports for a given manager.

  • Layers: maximum number of steps in a direct reporting line, from the CEO down to the most junior employee.

There is a whole field studying best practices for org design at large corporations (which is something I did a lot of when I was a management consultant). While of course not all of the principles applies to startups, I think some do help ensure a more communicative, efficient organization

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^^^ Warning: Don’t try this at home.

General rules for bands

  • Define bands as fully-loaded comp. I.e., base + annualized vesting equity + target bonus / commission (if applicable).

  • A good rule is 8-10 bands (excluding C-suite).

  • If you have operations in multiple countries / regions, it may make sense to have matched bands (e.g., Band 5 = Manager in US and VP in India) rather than a matrix of countries and bands

  • Bands should be a range, but as narrow as possible (at most +/- 10% even when factoring in equity variance). Minimize gaps or overlaps between bands.

  • Revisit bands under two conditions — a) you’ve raised a new financing round, in which case your equity banding needs to be redone for the new valuation, or b) it’s been at least 6 months, in which case enough has probably changed about your business to revisit.

  • The best benefit of a clear set of bands is transparency. You don’t have to go to the Bridgewater end of the spectrum and put everyone’s comp and performance out there, but there’s often a happy middle ground. For example, BCG shared the expected compensation for every level of seniority, once a year. At my last company, we drafted and shared the full set of bands to the entire team (and even candidates). This reduced uncertainty and anxiety around whether each employee was being paid fairly; but even more starkly, our offer conversations suddenly became extremely productive — instead of an arbitrary back and forth, we were making sure our discussions were grounded in a clear banding framework, and that the employer and candidate were speaking the same language.

General rules for spans

  • Spans are hard to prescribe with any specificity; it’s the most subjective of the three metrics. It certainly depends on the style of the manager, the nature of the business, and so on.

  • The median span of control for a fully-staffed, mature, tech-centric organization should be around 5-6 (i.e., if you list out all the people who have at least one direct report, the median on the list should have 5 or 6 direct reports).

  • Higher-throughput, smaller, earlier, or growing orgs might often be smaller, e.g., median of 4 at early or mid stage.

  • The more creative a function, the lower the span of control; for example, something like research would have a lower span than a function like ops or inside sales.

  • The larger and more operationally heavy you get, it might start gravitating towards 6-7.

  • I’ve rarely seen too high a span happen organically (except in something purely operational like a warehouse or call center), but a median of more than 7 across an organization is very unusual.

  • The more high-caliber / senior the direct reports for that function, the greater the span of control; for example, if a CEO has a rockstar executive team, the CEO could have 8-10 direct reports and still be very high-functioning team.

General rules for layers

  • Be strictest with your layers; excessive layers are the doom of most large organizations.

 

  • Revisit reporting relationships and layers 1-2 times per year during the re-evaluation of comp, titles, etc.

  • Layers will increase with the size of a company, but not as much as one might think.

    • Seed / A companies, <50 people: No more than 4 layers. If your CEO communicates something to the CTO, who delivers it to an Engineering Manager, who delivers it to a Senior Engineer, who delivers it to a QA Analyst… that’s far too much lost in translation for a 25-person company.

    • Series B / C companies, 50 – 500 people: Should probably max out at 5-6 layers. Revisit reporting relationships and layers 1-2 times per year during the re-evaluation of comp, titles, etc., especially once you get to 200+ people.

    • Series D+, 500+ people: For orgs of up to perhaps 1-2,000, 7 layers is appropriate. For a 20,000 person org, 8 layers is almost inevitable, but it should be done as infrequently as possible. I’ve seen large orgs with 11+ layers and they were, predictably, inefficient and disorganized, because the telephone game is amplified to the point of garbled nonsense.

Written by Hari Raghavan, Founder of AbstractOps

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