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Building an effective management structure: how to know if your company is too top heavy

Is our company top heavy?

It’s a common concern we hear – especially from people leaders in companies that are going through (or have recently gone through) a significant period of growth.

And it’s a very valid concern too.

A top heavy structure with too many management-level employees can mean overly high payroll costs, difficulties getting alignment on priorities and decisions, and not enough people who can actually get the hands-on work done.

Equally, too few managers stretched too thinly is a problem too, leaving teams with a lack of direction, guidance, and support.

But how do you know when a company is actually too top heavy?

Let’s take a look at Ravio's data on what a typical headcount mix looks like at companies at different stages, so you can compare your manager to employee ratio to the wider market.

Plus, we’ll also explore what other factors influence effective management structures beyond these numbers, with advice from expert people leaders:

  • JooBee Yeow – People and Organisational Expert at Notion Capital
  • Jessica During – Talent Manager at Breega
  • Andrew Duncan – Talent Director at Atomico

The typical ratio is 1:5 managers to employees

According to Ravio’s data, the average headcount mix for a company is:

  • 16% managers
  • 79% individual contributors (combining the professional and support tracks)

Which gives a typical ratio of around 1 manager to every 5 employees.

In Ravio’s Workforce Analytics tool, you can further explore how this typical mix of career tracks compares across different segments of the market e.g. industry or funding stage (which we’ll also take a look at later in this article).

And you can also easily analyse how your own company’s team compares to the typical breakdown too.

Ravio’s Workforce Analytics tool

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Is 1:5 managers to employees a good ratio for an effective management structure?

This typical 1:5 ratio does align with common advice of best practice, which is that a manager should have a maximum span of control of 5-6 direct reports.

Jessica During, Talent Manager at Breega agrees with that advice.

For her, anything above 6 direct reports gives managers too much on their plate at one time:

"Alongside day to day activities you have projects. Alongside projects you have ‘emergencies’ that arise unexpectedly. Alongside these emergencies you’re also working on developing your direct reports: 1:1s, coaching sessions etc. Let’s not forget the ‘open door policy’ for the wider team if and when needs be. Oh and your ever-growing to do list of future work and projects."

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Which means that, too many direct reports per manager is a one-way ticket to burnout:

"I’ve seen leaders with more than 6 direct reports burnout. And when that happens, the first thing to be sacrificed is managerial duties i.e 1:1s with direct reports."

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But, of course, there are exceptions to this ‘ideal’ ratio of 1:5 managers to employees.

A very senior manager may have many more direct reports than this ideal number of 5-6, but those direct reports will also be fairly senior themselves and work largely autonomously – so there is less management time required.

Or, a manager in a call centre or customer service role might be responsible for dozens of team members, where the focus on supervision is very different to a people manager in other industries.

And at the same time, if a manager has direct reports who are very junior or are new to the industry or area of work, they may require much more time for supervision and training.

Or, depending on the structure and lines of delegation, the manager may be required to also deliver work as an individual contributor alongside their people management duties.

In these cases, having 5-6 direct reports would be entirely unmanageable.

McKinsey highlight four key factors of ‘managerial complexity’ which impact what the ideal span of control is for a manager:

  • Time allocation. How much actual time is the manager spending on her or his own work versus time spent managing others?
  • Process standardisation. How standard and formally structured is the work process?
  • Work variety. How similar or different is the work of individual direct reports?
  • Team skills required. How much experience and training do team members’ jobs require? How independent are the direct reports?

And, the proportion of managers also changes as the size of the company grows too.

Does the ratio of managers to employees typically change throughout a company’s growth trajectory?

This 1:5 ratio of managers to employees is based on all companies in Ravio’s dataset – made up of over a thousand tech companies across Europe.

But, there is variance depending on the stage of growth a company is at.

Table showing the % headcount mix at companies at early stage, growth stage, and late stage

We can see that early stage start ups have the highest proportion of executives and the lowest proportion of managers.

This makes sense given that there are less employees overall (e.g. in a 30 person team, 7% executives is just two people, which could even be two co-founders!) and so there are less likely to be teams of people needing a manager at this stage – an early stage tech company, for instance, might have a couple of software engineering teams with a manager for each, but their marketing, operations, HR, and finance functions have only one or two employees each.

Notably, we can see there’s a substantial 2% increase in the proportion of management-level employees as companies move from growth to late stage – whilst, at the same time, the proportion of individual contributors remains exactly the same.

So if you’re concerned about your company becoming too top heavy this could be an important moment to be aware of – when the number of management team members typically scales up.

🤔 Does the increase of managers in the late stage impact gender diversity?

We recently explored how the gender pay gap at fintechs changes as companies grow and scale, and found that the gender pay gap increases from 25% to 37% as fintechs move from growth stage to late stage.

Our findings suggest that the hiring of additional managers at this stage could be a key reason as to why the gender pay gap widens so significantly at this point.

Is your management structure actually effective?

So, the numbers tell us that in a typical organisation structure a manager should have around five direct reports to be effective – any more than that, and you’re likely start to see some of those cost and alignment issues with a top heavy workforce creeping in:

  • A lack of alignment leading to slow decision-making processes and conflicting priorities
  • Too many layers of approval and sign off slowing down productivity
  • Unsustainably high payroll costs.

That’s the formulaic side of things.

But, we know there’s also a lot more complexity that goes into ensuring an effective management structure than keeping to that 1:5 ratio.

So, if you’re thinking of incorporating new manager roles into your team, here’s some considerations and advice from experienced people leaders.

Stay in the loop with the latest news, trends, and insights from Ravio:

‘Be crystal clear on the scope and expectations of roles’ – JooBee Yeow, People and Organisational Expert at Notion Capital

JooBee Yeow, people and organisational expert at Notion Capital

JooBee Yeow is a former Chief People Officer and is now leveraging her extensive experience to guide startups on how to effectively grow a team and operate at scale. She also shares her experiences through an ongoing blog series Scaling Start-Ups.

In JooBee’s experience, one of the pivotal aspects for companies is understanding how to craft an optimal management structure to build a high-performing organisation.

In our conversation with JooBee, she shed light on a common mistake: during periods of growth, companies embark on recruitment drives, forming new teams that inherently means new managers are needed – and organisations often choose to elevate their top-performing specialists (i.e. individual contributors or ICs) into these managerial positions.

The problem is that the transition from a specialist to a managerial role represents the most profound shift in mindset regarding one's role and the definition of success, in JooBee’s words, “it is not merely moving up a rung on the career ladder but a leap to an entirely different ladder!”

Regrettably, many startups fail to provide the necessary support to facilitate this transition – as we see reflected in research from the Center for Creative Leadership which found that, shockingly, nearly 60% of managers received no training whatsoever when assuming their initial leadership roles.

So, JooBee’s advice on this?

  • Define the role, right. Define the scope and expectations for each specific managerial role, and ensure those expectations align clearly with business needs. This proactive approach facilitates an unbiased assessment of candidates' suitability for roles, whether during the hiring process or when considering internal promotions.
  • Encourage ‘squiggly’ progression. Challenge the notion that progression equates solely to promotion into managerial roles. Emphasise that growth in experience, skills, and knowledge can follow a non-linear, 'squiggly' path.
  • Establish a clear IC career track. Alongside the above point, ensure there is a career path for individual contributors to avoid defaulting to managerial promotions as the sole means of recognising high performance – because progression doesn’t always mean taking a manager role. Recognise the ongoing need for IC roles to lead increasingly complex projects, products, or strategic initiatives.
  • Diversify your managers’ experience. When introducing a new management team, avoid filling all positions with internal promotions exclusively, because this will leave you with a management team that is new to managing. Bringing experienced managers on board as new hires ensures that inexperienced managers have opportunities to learn from experienced ones, accelerating their capabilities.

‘Plan ahead for the teams and roles you’ll have in five years time’ – Jessica During, Talent Manager at Breega

Jessica During, Talent Manager at Breega

Jessica has extensive experience in recruitment and HR, both as a consultant and internally for companies including Google, Expedia, and Enjoy Technology – where she grew the team from 10 to 350 people. She’s now the UK Talent Manager at Breega, supporting founders and people leaders at startups as they hire and build their teams in Europe.

One of the biggest mistakes that Jessica sees start ups making in terms of their management structure is failing to plan ahead for the long term.

There are many ways that a failure to plan can lead to ineffective management, including:

  • Hiring too many managers too soon. Having lots of senior team members early on in a company can leave those employees unsatisfied with the scope of their role, impacting your attrition rate – whilst also diluting your ESOP if you offer equity as part of compensation.
  • Promoting internally without training. It’s common for companies to promote existing employees into management positions without training them on how to be an effective leader – as JooBee also highlighted.
  • Not thinking ahead to the future org structure. Startups can grow quickly, and if you don’t think ahead to the teams and job levels you will have in the future, you might end up rapidly outgrowing your management structure. Fast-growing teams without plans for layers of management within those teams are also one of the reasons that managers end up with more than 5/6 direct reports – which as we saw from the data and heard from Jessica earlier in this article, is also a big issue.
  • A lack of diversity in leadership. If you aren’t thinking strategically about the overall management team and structure you want your company to have in the future, you also risk ending up with a lack of diversity in your management team – both in terms of experience and leadership styles, as well as representation in terms of sex, race, sexuality, people with impairments etc. Inclusive leadership teams have been shown to make better business decisions up to 87% of the time, so this is important as your company develops.

So, what can companies do to prevent this from happening?

Here’s Jessica’s advice:

  • Plan out your future team. Know your 5 year plan and what needed from each department in order to reach it. Then hire department heads who have successfully built teams previously to achieve a similar plan: these individuals will bring insight on best practice. They will then be able to hire additional managers based on the planned hierarchy (like Team Leads, Supervisors, Senior Managers etc) at the right times, giving opportunities to promote internal talent and to lighten the load on existing managers as your headcount grows.
  • Design a training plan for new managers. Sourcing managers internally and giving team members the chance to transition into their first leadership role is a great opportunity to cut costs and retain top individuals – but you need to make sure they have the right training opportunities and tools to be effective leaders.
  • Keep to that rule of a maximum of 6 direct reports. View this number as a ‘critical mass’ for your managers – if any manager comes close to having 6 direct reports, it’s time to review and plan your next steps in terms of your job architecture and team structures.

‘Get clarity on a management structure that aligns with the company’s commercial goals’ – Andrew Duncan, Talent Director at Atomico

Andrew Duncan, Talent Director at Atomico

Andrew has supported countless founders on the evolution of their leadership teams and, particularly, the strategic hiring of executive level team members – both in his previous role with The Up Group, and his current role as Talent Director at Atomico.

Speaking with Andrew about building effective management teams, one of the key themes which kept emerging was the importance of having absolute clarity over the company’s overall goals and commercial objectives, before bringing leaders on board.

Like Jessica, Andrew highlighted that too many start ups hire their team leaders on an adhoc basis when a need surfaces (and often they’re hired with title inflation which causes issues down the line).

Or, they raise a new funding round and that acts as the spark for a hiring spree.

Equally, today many start ups to implement a flat hierarchy, with a smaller than normal layer of managers. For Andrew, this idea of a flat hierarchy is too often romanticised. In reality it leads to a lack of accountability and a lack of leverage to drive functions forwards in an organised way – once a company has a headcount beyond around 20 people, this kind of flat hierarchy is simply ineffective.

Over time mistakes like this can result in a dysfunctional leadership team, because very little thought has gone into building an overall management structure that truly aligns with the company’s trajectory.

So what’s the alternative?

Andrew suggests:

  • Get clarity on overall company goals and commercial objectives first. Headcount planning and management team hiring should be driven by the overall goals and vision for the business, so that you’re building a management structure which aligns with the company’s goals and roadmaps – so make sure there’s clarity on top level business strategy before starting to hire a leadership team.
  • Orient hiring around those overall goals. Once there’s clarity on the business strategy, hiring can be properly thought through and strategically focused on building key functions to support those overall goals, designing a team in a structured way as the company reaches key milestones in its roadmap – rather than hiring in an adhoc manner.
  • Hire a great people leader early. Having a HR Director or VP of People early on in a startup means that there’s a team member responsible for the strategic thinking outlined above in terms of people and talent – which is otherwise not seen as a priority by the founding team. This also means that the risks of having an ineffective management structure (particularly burn out and churn rate) can be managed.

“When I moved to London from Silicon Valley seven years ago it was relatively rare for senior HR to be a priority hire in a European start up. The early people focus would centre on recruitment, with the rest left as an afterthought to figure out later. Fortunately, that’s changing today. And for good reason: strategic hiring and the health of the people function is absolutely crucial for overall business success.”

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And alongside this, once that great leadership team is in post, it’s equally important to set them up for success – Andrew has two big pieces of advice here:

  • A strong network for leadership advice. It’s important that the internal leadership team is made up of people with a mix of backgrounds e.g. scrappy start ups vs global corporates, experienced leaders vs first-time leaders to ensure healthy debates and learning from one another. Equally, it’s also important that leaders have external mentors to get impartial advice from – this is something Atomico always prioritise for their portfolio companies.
  • Always have a back up plan. As much as we’d love great employees to stay with us forever, this isn’t the reality. It’s important to understand what the likely tenure is for those in your management team, and to have a contingency plan for when they leave. Ideally, this should involve developing natural successors by upskilling high-performing team members on leadership so they’re ready to take the next step when the opportunity arises.