The finance director slides the compensation analysis across the table. The numbers are worse than you expected.
To maintain market competitiveness across all 120 roles, you'd need to increase total compensation budget by 23%. That's £840,000 annually. Your EBITDA margin barely supports half that.
But here's the darker reality: Your top 15 performers—the people driving 60% of company value—are each fielding 2-3 recruiter calls weekly. They're underpaid by 15-25% relative to what they could get elsewhere. Three have already left in the past 6 months.
The mathematical impossibility: You can't afford to pay everyone market rate. But you can't afford to lose your top performers.
Welcome to the compensation strategy crisis facing every mid-market firm in high-growth mode.
The Compensation Reality for Mid-Market Firms in 2025
The Market Data:
UK compensation trends for 2025 paint a challenging picture:- 13% fewer firms introducing salary increases than projected- 19% more firms lowering bonuses than initially anticipated- Organisations prioritising stability over uplift in challenging market- Yet median "market rate" salaries increased 4.2% year-over-year
Translation: Your competitors are also struggling with compensation inflation. But the ones winning talent wars are making different strategic choices about where to invest.
The New Compensation Paradigm:
Traditional approach: Relatively consistent pay across levels, small variations for performance, occasional "market adjustments" when someone gets competing offer.
This worked when:- Markets were stable (predictable 3-4% annual increases)- Talent mobility was lower (average tenure 4-5 years)- Information asymmetry existed (employees didn't know their market value)
None of these conditions exist in 2025.
The Changed Reality:
- Salary transparency legislation forcing disclosure- Employees have real-time market data (Glassdoor, levels.fyi, Blind)- Remote work enabling national/global talent competition- Top performers know their worth and have options
The compensation strategy that worked at £8M revenue doesn't scale to £40M.
The Five Compensation Failures Killing Mid-Market Growth
Failure #1: The Egalitarian Delusion
"We pay fairly. Everyone at the same level makes similar amounts."
This sounds equitable. It's actually destroying your business.
Research across private equity and mid-market firms shows top performers deliver 3-5x the value of average performers in knowledge work. Paying them 10-15% more doesn't reflect this differential.
The Value Differential:
Average developer: Delivers 12 story points per sprint, code requires normal review cycles, produces competent but unremarkable work.
Top developer: Delivers 28 story points per sprint, code ships with minimal revisions, solves complex problems others can't, mentors 3 junior developers raising their productivity 30%.
Value differential: 3.8x
Compensation differential in most mid-market firms: 1.15x
The Inevitable Result:
Top developer gets recruited away. Replacement: £12,000 in recruiting costs, 4-month ramp period, delivers average productivity.
You "saved" £8,000 annually by not paying top performer appropriately. You lost £60,000 in recruiting costs, productivity during vacancy, and ramp time. Plus lost the multiplier effect of their mentorship.
The Fix: Abandon pay equality. Embrace pay equity based on value created.
Failure #2: The Base Salary Trap
Most mid-market firms structure compensation as:- 85-95% base salary- 5-15% annual bonus- 0-5% equity (if any)
This made sense when labour markets were stable and company growth was linear.
In high-growth environments, this structure fails because:
Problem 1: Fixed Costs Scale Faster Than Revenue
£4.5M payroll at 85% base salary = £3.825M in fixed costs.If revenue drops 20% temporarily, you still owe £3.825M.
Problem 2: No Alignment with Company Performance
Employee gets paid the same whether company grows 5% or 50%.Why should they care about aggressive growth targets?
Problem 3: Can't Reward Exceptional Performance Meaningfully
Top performer delivers 3x average value. Your bonus budget is 10% of salary.Maximum reward for 3x performance: £6,000 bonus on £60,000 salary.Competitor offers £72,000 base salary. Your retention tool is inadequate.
The Fix: Rebalance towards variable compensation and equity.
Failure #3: The Equity Ignorance
Most mid-market firms either:- Don't offer equity at all, or- Offer equity grants so small they're meaningless
The Equity Math:
You're a £35M revenue company targeting £100M in 5 years. You'll sell for 6x EBITDA at £100M revenue (assuming 10% EBITDA margin = £10M EBITDA × 6 = £60M exit value).
Employee with 0.25% equity: £150,000 at exitEmployee with 0.1% equity: £60,000 at exitEmployee with 0.05% equity: £30,000 at exitEmployee with 0%: £0
A 0.25% grant costs you nothing today and could be worth £150,000 in 5 years.
Yet most mid-market firms are stingy with equity because:- "Dilution concerns" (irrational—would you rather own 100% of a £35M company or 88% of a £100M company?)- "Complicated to administer" (not really—EMI schemes in UK streamline this)- "Employees don't value it" (because you haven't helped them understand it)
Failure #4: The One-Size-Fits-All Approach
Your compensation structure treats all roles identically:- Engineers: 90% base, 10% bonus- Sales: 90% base, 10% bonus- Operations: 90% base, 10% bonus
This ignores fundamentally different value creation mechanisms:
Sales: Performance highly variable, directly measurable, individual contribution clear→ Should be 40-60% variable (base + commission)
Engineering: Performance variable but harder to measure individually, team-based contribution→ Should be 70-80% base, 10-20% bonus, 10% equity
Operations: Performance consistent, value from process adherence→ Should be 85-90% base, 10-15% bonus, 5% equity
G&A (Finance, HR, Admin): Performance stable, support function→ Should be 90-95% base, 5-10% bonus
The Fix: Role-specific compensation structures aligned to value creation.
Failure #5: The Reactive Posture
Most mid-market compensation strategy:1. Hire someone at "market rate" (defined by salary surveys)2. Give annual 3-5% increases3. When someone gets competing offer, panic and counter-offer or let them leave4. Repeat
This is compensation strategy by crisis management.
The Problems:
- You're always behind market (annual adjustments trail real-time market changes)- Counter-offers are expensive and signal wrong incentives (threaten to leave to get raise)- Best performers leave before you can counter (they don't give you opportunity)- You're optimising locally (each decision in isolation) not globally (total compensation strategy)
The Fix: Proactive, market-informed, strategically differentiated compensation.
The Strategic Compensation Framework for High-Growth Mid-Market Firms
Foundation 1: The Tiered Performance Model
Abandon the fiction that all employees deliver similar value. Explicitly tier based on performance and potential.
The 3-Tier System:
Tier 1: Core Contributors (60-70% of employees)- Consistently meet expectations- Reliable performers- Important but not irreplaceable- Compensation strategy: Market median (50th percentile)
Tier 2: High Performers (25-30% of employees)- Regularly exceed expectations- Solve complex problems- Potential for leadership- Compensation strategy: 75th-85th percentile + equity
Tier 3: Critical Talent (5-10% of employees)- Exceptional contribution- Multiply team effectiveness- Extremely difficult to replace- Compensation strategy: 90th percentile + significant equity + retention incentives
The Difficult Decisions:
This requires explicitly deciding: "Who are our Tier 3 people?"
One £52M professional services firm went through this exercise:- 127 employees- Identified 9 as Tier 3 (7%)- Increased compensation for those 9 by average of £18,000 each- Total investment: £162,000 annually- Retention over next 18 months: 9 of 9 (previously losing 2-3 top performers annually)- Savings from avoiding replacement costs: £78,000- Productivity preservation: Unquantified but substantial
The Controversial Part:
This means being honest that some roles/people are more valuable than others. Most mid-market leaders resist this transparency.
But here's reality: Your employees already know who the stars are. Your comp strategy should reflect that reality, not pretend it doesn't exist.
Foundation 2: The Compensation Structure Rebalancing
From:- Base: 90%- Bonus: 10%- Equity: 0%
To:- Base: 70%- Bonus: 15%- Equity: 15% (present value)
The Detailed Structure:
Base Salary:- Sufficient for living expenses and security- 70-75% of total compensation- Market-referenced but not market-leading
Annual Bonus:- Performance-based (individual + company)- 10-20% of base salary- Paid annually, contingent on measurable goals
Equity:- Long-term incentive- 4-year vest, 1-year cliff- Valued at current company valuation- Represents 10-20% of total comp package at grant
Example: £60,000 Mid-Level Role
Old Structure:- Base: £54,000- Bonus: £6,000 (if goals met)- Equity: £0- Total: £60,000
New Structure:- Base: £48,000- Target Bonus: £10,000 (if goals met)- Equity Grant: £12,000 present value (vests over 4 years)- Total: £70,000 (with equity)- Annual cash: £58,000
The Trade-Off:
Annual cash decreases slightly (£58K vs. £60K). But total compensation increases (£70K vs. £60K) and employee now has meaningful equity upside.
This works for employees who:- Believe in company growth (equity will appreciate)- Can accept slightly lower cash for equity upside- Want alignment with long-term success
This doesn't work for employees who:- Need maximum cash today- Don't believe company will succeed- Prioritise stability over upside
The Selection Effect:
This compensation structure self-selects for people who want to build something, not just collect a paycheque. That's a feature, not a bug.
Foundation 3: The Equity Architecture
The Employee Option Pool:
Standard practice: Reserve 10-15% of fully diluted equity for employee option pool.
For a £35M company:- 10% employee pool- 120 employees- Average grant: 0.083% per employee
At £60M exit (5-year target): Average employee equity value = £50,000
This seems meaningful. But it's barely competitive with tech firms offering 0.25-0.5% grants to mid-level employees.
The Strategic Equity Allocation:
Don't distribute equity evenly. Concentrate it where it drives most value.
Tier 1 (Core Contributors): 0.02-0.05% grantsTier 2 (High Performers): 0.1-0.2% grantsTier 3 (Critical Talent): 0.3-0.6% grants
The Math:
- 80 Tier 1 employees × 0.03% average = 2.4% of pool- 35 Tier 2 employees × 0.15% average = 5.25% of pool- 5 Tier 3 employees × 0.45% average = 2.25% of pool-Total: 9.9% of company (within 10% pool)
Tier 3 Employee Equity Value at Exit:
0.45% × £60M exit = £270,000 over 4 years = £67,500/year equivalent
This meaningfully competes with FTSE 250 cash compensation premiums.
The EMI Scheme Advantage (UK-Specific):
Enterprise Management Incentive schemes allow:- Employees to exercise options at grant price (not exit price)- Capital Gains Tax treatment (20%) instead of Income Tax (40-45%)- £250,000 lifetime limit per employee
For a Tier 3 employee:- £270,000 equity value at exit- EMI-qualified: £54,000 tax vs. £121,500 without EMI- £67,500 savings (25% increase in take-home)
The Vesting Schedule Design:
Standard: 4-year vest, 1-year cliff, monthly thereafter
Strategic Alternative: Performance Vesting
- 50% time-based (standard 4-year vest)- 50% performance-based (vests when company hits milestones)
Example Performance Vesting:- Tranche 1 (20%): Vests when company reaches £50M revenue- Tranche 2 (20%): Vests when company reaches £75M revenue- Tranche 3 (10%): Vests when EBITDA margin exceeds 12%
This creates alignment between what employees do and what they're rewarded for.
Foundation 4: The Bonus Structure Redesign
Most mid-market bonuses are theatre:- Everyone gets roughly the same percentage (8-12%)- Loosely tied to "performance" but really discretionary- Feels obligatory, not motivational
The Strategic Bonus Framework:
Two-Component Structure:
Component 1: Company Performance (50-70% of bonus pool)
Tied to measurable company-wide goals:- Revenue target: £42M (stretch goal £45M)- EBITDA margin target: 11% (stretch: 12%)- Customer retention: 88% (stretch: 91%)
Funding Formula:- Below targets: 50% of pool funded- Meet targets: 100% of pool funded- Exceed targets: 150% of pool funded (capped)
Component 2: Individual Performance (30-50% of bonus pool)
Tied to role-specific, measurable objectives:- Sales: Revenue target, new customer acquisition, deal size- Engineering: Feature delivery, quality metrics, technical debt reduction- Operations: Efficiency gains, cost reduction, process improvements
Rating Scale:- Below expectations: 0% of individual component- Meets expectations: 100% of individual component- Exceeds expectations: 150% of individual component (capped)
Example: £60,000 Employee, 15% Target Bonus (£9,000)
Scenario 1: Company hits targets, employee exceeds- Company component (60%): £5,400 × 1.0 = £5,400- Individual component (40%): £3,600 × 1.5 = £5,400- Total bonus: £10,800 (120% of target)
Scenario 2: Company exceeds, employee meets- Company component: £5,400 × 1.5 = £8,100- Individual component: £3,600 × 1.0 = £3,600- Total bonus: £11,700 (130% of target)
Scenario 3: Company misses, employee exceeds- Company component: £5,400 × 0.5 = £2,700- Individual component: £3,600 × 1.5 = £5,400- Total bonus: £8,100 (90% of target)
The Key Insight: Bonus reflects both company success and individual contribution. Can't high-perform your way to full bonus if company struggles. Can't coast if company succeeds.
Foundation 5: The Role-Specific Structures
Sales Compensation:
- Base: 40-50% of OTE (On-Target Earnings)- Variable: 50-60% of OTE- Equity: 5-10%
Example: £75,000 OTE sales role- Base: £37,500- Commission: £37,500 (at 100% quota)- Equity: 0.1% (£60,000 value at exit = £15,000/year equivalent)
Commission Structure:- <80% quota: Base commission rate- 80-100% quota: 1.2x commission rate- 100-120% quota: 1.5x commission rate->120% quota: 2.0x commission rate
This creates strong incentive for exceeding quota (£90,000 earnings at 150% quota achievement vs. £75,000 at 100%).
Engineering/Product:
- Base: 70-75%- Bonus: 10-15%- Equity: 15-20%
Heavier equity weighting reflects:- Value compounds over time (features built today drive revenue for years)- Team-based contribution (harder to measure individual value)- Long-term thinking desired (don't want engineers optimising for quarterly goals)
Operations/G&A:
- Base: 85-90%- Bonus: 10-15%- Equity: 5%
More stable roles with predictable value → higher base, lower variable.
Leadership:
- Base: 50-60%- Bonus: 20-30%- Equity: 20-30%
Higher risk, higher reward. Leadership success directly correlates to company success.
The Compensation Communication Strategy
Compensation strategy fails when employees don't understand it.
The Transparency Framework:
What to Share:
Company-Wide:- Compensation philosophy (how we think about pay)- Structure explanation (base/bonus/equity)- Performance tier definitions (what distinguishes Tier 1/2/3)- Market positioning (we target X percentile for Y roles)
Individual:- Personal compensation breakdown- Performance tier assignment and rationale- Equity grant details and valuation methodology- Path to advancement (what changes required to move from Tier 1 to Tier 2)
What Not to Share:
- Specific peer compensation (creates comparison toxicity)- Individual performance ratings of others- Bonus pool funding details before announcement
The Equity Education Programme:
Most employees don't understand equity. A 0.25% grant means nothing without context.
The Education Components:
Component 1: Equity 101 Session (60 minutes)
- What is equity? (ownership percentage)- How do options work? (right to buy at strike price)- Vesting explained (earn over time)- Taxation (EMI benefits, capital gains treatment)- Exit scenarios (what equity worth at different exit valuations)
Component 2: Personal Equity Calculator
Spreadsheet tool where employees input:- Current company valuation: £35M- Personal equity percentage: 0.25%- Exit scenarios: £50M / £75M / £100M- Exit timing: 3 years / 5 years / 7 years
Output: Personal equity value at each scenario.
Example Output:- £50M exit in 5 years: £125,000 (£25,000/year equivalent)- £75M exit in 5 years: £187,500 (£37,500/year equivalent)- £100M exit in 5 years: £250,000 (£50,000/year equivalent)
Suddenly equity becomes tangible.
Component 3: Annual Equity Updates
- Company performance vs. plan (are we on track for growth targets?)- Valuation updates (if new funding round or financial milestones hit)- Vesting reminders (how much has vested, how much remains)
The Market Referencing Discipline
"Market rate" is not a single number. It's a range influenced by:- Company size and stage- Geographic location- Industry sector- Role seniority- Individual performance
The Comp Benchmarking Approach:
Data Sources:
UK-Specific:- ODM Partners UK Mid-Market Compensation Benchmark Report (updated annually)- Glassdoor UK salary data (filtered by role, company size, location)- Reed Salary Checker- LinkedIn Salary Insights- CIPD Reward Management Survey
Role-Specific:- Tech: levels.fyi (though US-heavy, provides directional guidance)- Professional Services: Hays Salary Guide UK- Operations/Manufacturing: Indeed UK + sector-specific surveys
The Benchmarking Process:
Step 1: Role Leveling
Define clear levels with objective criteria:- Junior (0-2 years experience, executes defined tasks)- Mid (3-5 years, operates independently, solves moderately complex problems)- Senior (6-10 years, leads projects, mentors others)- Principal (10+ years, defines strategy, multiplies team effectiveness)
Step 2: Market Data Collection
For each level, gather 50th/75th/90th percentile data from 3-5 sources.
Step 3: Positioning Decision
Tier 1 roles: Target 50th percentile (market median)Tier 2 roles: Target 75th percentileTier 3 roles: Target 90th percentile (or higher if critical)
Step 4: Annual Adjustment
Review annually, adjust for:- Market movement (typical 4-5% annual increase)- Company performance (can afford to maintain/increase competitiveness?)- Individual performance (promotions, tier changes)
The Budget Realism:
For a 120-person company with £4.5M payroll:
Scenario: Maintain Market Competitiveness- 70 Tier 1 employees: 3% average increase = £94,500- 40 Tier 2 employees: 5% average increase = £90,000- 10 Tier 3 employees: 8% average increase = £48,000-Total: £232,500 (5.2% overall increase)
Scenario: Strategic Reallocation- 70 Tier 1: 2% increase = £63,000- 40 Tier 2: 6% increase = £108,000- 10 Tier 3: 12% increase = £72,000-Total: £243,000 (5.4% overall increase)
Similar budget, different allocation: prioritise retention of top performers, accept some Tier 1 below-market drift.
The Compensation Mistakes That Kill Companies
Mistake #1: The Counter-Offer Trap
Employee gets competing offer. You panic and match it. They stay.
Why this fails:- Signals to other employees: "Threaten to leave to get a raise"- Temporary fix (they're still flight risk, now you've trained them negotiation tactics work)- Expensive (you gave 20% raise you weren't planning to give)
The Alternative:
Proactive Retention:- Identify flight risks before they get offers- Address compensation gaps before forced to counter-offer- Have honest conversations: "You're underpaid. Here's the plan to fix it over next 12-18 months."
Counter-Offer Decision Framework:
If employee brings competing offer:
Question 1: Are they Tier 2 or Tier 3 talent? (If Tier 1, let them go—replacement cost is acceptable)
Question 2: Were they already planning to leave, or genuinely evaluating options?
Question 3: Is compensation the only issue, or symptom of deeper dissatisfaction?
Decision Matrix:- Tier 2/3 + Genuinely evaluating + Comp is real issue = Counter-offer worth considering- All other scenarios = Let them go
Mistake #2: The Uniform Increase
"Everyone gets 4% this year."
This treats compensation as entitlement rather than performance-based reward.
The Problems:- Top performers subsidize average performers- No incentive to exceptional performance- Compression (new hires make similar to tenured employees)
The Alternative:
Differentiated increases based on performance:- Bottom 10% (improvement plans or exit): 0%- Core 60%: 2-3%- High performers 25%: 5-7%- Critical talent 5%: 8-12%
Mistake #3: The Opacity Strategy
"We don't discuss compensation."
This made sense when information was scarce. In 2025, opacity just breeds distrust.
The Transparency Spectrum:
Full Transparency: All salaries public- Works for: Small teams (< 30), extremely strong culture- Risky for: Most mid-market firms (creates comparison toxicity)
Strategic Transparency: Bands and philosophy public, individual salaries private- Share salary ranges for each level- Explain how individuals can progress through bands- Clarify performance tier implications
Recommended for Most Mid-Market Firms:
This balances transparency (employees understand the system) with privacy (don't create harmful peer comparisons).
Making the Compensation Strategy Shift
The Implementation Roadmap:
Phase 1: Assessment & Design (Months 1-3)
- Benchmark current compensation vs. market- Identify retention risks (who's significantly underpaid?)- Design tier system (who's Tier 1/2/3?)- Model equity pool allocation- Design new bonus structure
Phase 2: Leadership Alignment (Month 3)
- Present strategy to leadership team- Debate and refine- Secure budget commitment- Train managers on new approach
Phase 3: Communication Rollout (Month 4)
- All-hands presentation: New compensation philosophy- Individual conversations: Personal tier assignment and implications- Equity education sessions- Documentation and FAQs
Phase 4: Implementation (Months 5-6)
- Equity grants distributed- Compensation adjustments made- New bonus goals set- First performance reviews under new system
Phase 5: Iteration (Month 12+)
- Gather feedback- Assess effectiveness (retention, performance, cost)- Refine based on learnings
The Investment:
For 120-person company restructuring compensation:
One-Time Costs:- Compensation consultant: £12,000-£18,000- Equity administration setup (EMI scheme, option agreements): £8,000-£12,000- Communication materials and training: £5,000-Total: £25,000-£35,000
Ongoing Incremental Costs:- Rebalancing comp mix (more equity, more variable): £150,000-£250,000 (though much is timing shift, not pure cost)- Equity administration: £8,000-£12,000/year
The Returns:
Retention Improvement:- Reduce top performer attrition from 25% to 10%- 6 fewer Tier 2/3 departures- Savings: £78,000 (replacement costs) + productivity preservation
Performance Improvement:- Better alignment (bonus tied to goals)- Conservatively: 5% productivity improvement- Value: £225,000 (on £4.5M labour input)
Total Year 1 ROI: £303,000 benefit - £185,000 cost = £118,000 net benefit
Compounding Years 2-3: Benefits accelerate as culture of performance becomes embedded.
The Final Trade-Off
The strategic question: Pay everyone adequately, or pay top talent competitively and let others drift?
The egalitarian impulse: "We should pay everyone fairly."
The strategic reality: "We should pay top talent competitively and tier others based on value."
Most mid-market firms try to split the difference: slight variations, nobody dramatically underpaid, nobody dramatically overpaid.
This middle-ground fails because:- Top talent leaves (not paid competitively)- Average performers stay (overpaid relative to value)- Company gradually becomes collection of B-players
The companies winning talent wars make uncomfortable choice: Explicitly tier, pay top performers competitively, accept that others may be slightly below market.
This feels harsh. But it's honest.
Your company's success depends on attracting and retaining exceptional people in critical roles. Compensation strategy should reflect this reality, not obscure it.
The choice is yours: comfortable egalitarianism that slowly kills competitiveness, or strategic differentiation that feels uncomfortable but wins.
Which can you live with?