Pareto Guide to Org Design

by Hari Raghavan in

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.

Manu Cornet (link)

Pareto rules for bands

  • Define bands as fully-loaded comp. I.e., base + annualized vesting equity + target bonus / commission (if applicable).
  • Set at least 8 bands, possibly more, with a range of 20% or less (e.g., $80-$100K, $150-180K)
  • Minimize gaps or overlaps between bands
  • Transparency is often a good thing when you have a fair framework. This reduces uncertainty and anxiety around whether each employee was being paid fairly and makes offer discussions extremely productive. It also grounds the company and candidate in a clear framework, with everyone speaking the same language
  • Revisit bands after a) You raise a new financing round and/or b) 6-12 months, assuming enough has changed about your business

Pareto rules for spans

  • There are more "right answers" with spans
  • The median span of control for a fully-staffed, mature, tech-centric organization should be ~5-6
  • Factors that result in a high span (6+) for a manager include a) more mature companies (i.e., there are well-codified procedures), b) companies that are more operationally heavy (there are standard procedures with people executing, e.g., CSM, operations), and c) cases where there are high-caliber / senior direct reports (i.e., reports serve as deputies; for example, CEOs often have 8+ direct reports)
  • Factors that result in a low span (4 or less) for a manager include a) smaller, earlier, or growing orgs and b) creative or complex functions (research, legal, engineering)

Pareto rules for layers

  • Excessive layers are the doom of most large organizations.
  • Layers will increase with the size of a company, but not as much as one might think.

Layers for each stage

Seed / Series A stage (<50 people)

  • Layers: 4 or fewer
  • Too many layers at this stage can cause confusion. (i.e. CEO → CTO → Eng Mgr → Sr. Engineer → QA Engineer is too much lost in translation for a 40-person company)

Series B/C stage (50-500 people)

  • Layers: 5-6 or fewer
  • Revisit reporting and layers 1-2 times per year during performance reviews (esp. once 200+ people)

Series D+ stage (500-5000 people)

  • Layers: 6-7
  • Only functions that are well codified or remote (e.g., warehouse, call center) should get to 8 layers

Series D++ stage (5000+ people)

  • Layers: 7-9

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