Self-Set Salaries: A Practical Guide
The practice of employees setting their own salaries is still controversial. If you’re not a regular reader of our blog you might be shocked to hear that some companies actually do this. So, why? Doesn’t this result in sky-high salary budgets? Won’t this endanger the organization? The answers are “no”—if its done properly.
Recently, an interesting conversation took place in the Corporate Rebels online community. One member asked for advice on how to let employees set their salaries.
The result? People contributed ideas and resources. These ideas triggered this blog post.
Why let employees set their own salaries?
In traditional organizations, setting salaries is often a mystical process involving secrecy, negotiation and, occasionally, dishonesty. Employees might aim high anticipating that managers will try to bring them down.
The goal then becomes a consensus that neither party finds offensive. Unfortunately, this might not be the appropriate salary—for all kinds of reasons. The process does not promote straightforwardness. In some companies it promotes the opposite.
One way to eliminate a lot of frustration and distrust is to open up salaries to everyone inside (even outside) the company. One of the pioneers of salary transparency is Buffer. And on their website they publish their formula for determining salaries. This has paved the way for others.
But nowadays, some organizations have gone beyond salary transparency. They have given up on in fitting people into an algorithm. They have tried many, and found that reality is simply too messy for a neat formula.
Hanno (a digital design company) describe their process in this great blog post Why did they let go of their salary formula?
“We quickly realized that there will always be edge cases. […] And people just don’t fit neatly into formulae. Our problem was that while we had noble intentions, we were approaching the problem from the top down, defining a formula and trying to squeeze everyone into it.
What we really needed to do was to take the opposite approach—try to figure out how to approach things from the bottom up, in a way that would satisfy each member of our team. As Ricardo Semler once said: “Conventional salary systems after all, strive for standardization. The system we were contemplating would be individualistic.”
Radical companies like these reap more benefit from letting employees set their own salaries.
Reaping the benefits
How? Some say it increases ownership and fairness. Others do it to encourage entrepreneurship, increase transparency, build trust, and increase engagement.
Dennis Bakke, former CEO of AES, described the effects as follows: “The individuals who participated in this approach were changed by the process. They had a much better understanding of how compensation affected the overall economics of the organization. They learned the value of seeking advice when they had to balance competing interests. They put the interests of other stakeholders on a par with, or even ahead of, their own. The process pulled team members together, and helped some make the transition from workers to business people. It made them “owners” of their business. For the first time, they understood what it meant to be stewards. This method of setting compensation was stressful, successful, and fun.”
While a growing number of organizations understand these benefits, and are starting to experiment, it’s important to realize that this is not new. Some Bucket List companies have done this for a long time.
Morning Star is a good example. They are famously a fully self-managing organization. Employees there have been determining their own pay for decades. And at Brazilian company Semco, employees have set their own salaries since the 1980’s. Others, like Finext and BvdV have also embraced this practice for many years.
In traditional organizations, the entire salary setting process does not promote honesty and transparency. In most companies the process promotes the exact opposite.
So, let’s say you’re ready to give employees the freedom and responsibility for setting their own salaries. How the hell do you go about it? What can you learn from others who have already done it?
Here are 4 suggestions to get you started.
How to let employees set their own salary
1. How to decide the salary increase
At Incentro they use this process:
- The first step in self-set salaries is training in basic finance. Employees need to understand how the company works: how revenue, costs, and profits are built up. Incentro organized workshops on “How the company works from A-to-Z”. Attendance was voluntary, and 90% of employees showed up.
- Next, they conducted a simple survey. Two questions: “What salary raise (in %) would you suggest for next year?” and “What is the motivation of your choice”.
- They discussed the survey outcomes in groups by asking three simple questions: “What is best for myself?”, “What is best for us as a group?”, and“What is best for the company in general?”
- The final step was to reflect, individually, on the process. Adjustments could be made by employees, after which they submitted their final salary increase.
What happened? The year before the experiment, salaries increased on average by 4.5%. After the experiment they were up by 4.9%. But the process led to other, more interesting outcomes: the understanding of how Incentro works increased, employees felt more empowered, and happiness and engagement scores were higher than before.
2. The business case
At London based startup, Smarkets), employees set their own salaries differently. Each six months they go through this process:
- Each person provides a business case and a proposed salary increase. The number is benchmarked against performance, market rates, and peer feedback.
- The business case is open for all to see. Anyone can contest a salary rise if they disagree. Therefore, as one of the employees puts it: “Approval is […] provided by consensus of your colleagues”.
The entire process at Smarkets is transparent to all. In their blog post on this practice they discuss the downsides: “In being different, the major downside is that on some occasions the negotiation period can be drawn out until a shared understanding and agreement is reached.”
This is a downside that the following two approaches have solved.
3. The compensation committee
At Morning Star, they work with a so-called compensation committee. This committee consists of elected employees who calibrate and provide feedback on the proposed pay of employees.
The yearly process looks like this:
- You write a letter stating the salary you think is fair, and your reasoning as to why. It should include peer feedback and data to back up your performance.
- The letter is sent to the compensation committee. They review all the letters and provide feedback. They suggest employees lower their salary if they think it’s too high, and vice versa if they think it’s too low.
- Taking the feedback into account, employees determine their salary level.
If conflicts arise, employees at Morning Star use a conflict resolution process
4. The advice process
The advice process is very similar, but there is no special compensation committee.
In some organizations, employees can seek advice from a number of people, as they see fit. In others, they ask direct team members for advice. They base their salary level on that feedback.
Examples of organizations that work like this include: Finext, Hanno, Makers Academy.
To get an understanding of what would be a good starting point for your salary proposal, some companies use a short list of questions to help employees determine a good pay level. Here are the questions Hanno uses:
- How much do I need to earn, in order to live and to be satisfied with my pay?
- How do the next 3-6 months look for me? (Thinking about longer periods helps discourage swings in compensation, which make budgeting hard.)
- How much can [the company] afford to pay? (Total transparency of company financials is a huge help here.)
- How much do my fellow [colleagues] earn? (We have a spreadsheet listing how much everyone in the team has been paid each month, this year.)
- How much do other people in my city/country earn?
- How much do people with my skills and responsibilities earn elsewhere?
These questions are a great starting point for discussions and advice seeking.
In determining your own way to move to self-set salaries, don’t simply copy-paste what others are doing. While many of them seem very similar, there are often important differences in the details.
It’s important to determine your own approach through trial and error. Let these approaches be a source of inspiration. And for even more, check out these resources:
- The process at Makers Academy
- Buffer’s salary formula
- Dev Academy’s approach
- Hanno’s experiences
- Incentro’s experiment
We hope this overview will help you to set up your own experiments on self-set salaries. While the process might be tough, even frustrating at times, it’s definitely worth the struggle—according to these Bucket List companies