Should you let employees decide their own salaries?

Radical transparency and peer pressure can have a moderating effect, argues author Aaron Dignan.

by Aaron Dignan
Last Updated: 26 Mar 2019

When it comes to setting salaries, we’re stuck in the past. For too long compensation has been kept under lock and key — known only to the managers and leaders above us. And it’s not just them.

Talking openly about money remains an outright taboo in our culture, even though this secrecy is hurting us. In any negotiation, whoever has more information has the advantage. When it comes to compensation, employers know a lot and employees know very little. This results in a wide range of salaries for the same role, both within firms and across industries.

More than half of this "wage dispersion" can be attributed to workers not knowing the wages offered by all employers, as well as cross-firm differences in wage policy and productivity. This allows unconscious bias and favouritism to creep in undetected. Pay gaps based on gender and race persist. Negotiations favour louder voices and people who look and talk like us. While moving to transparent pay can help, it doesn’t answer the question of how we should set compensation in the first place.

Many progressive organisations base their compensation on the market. Approaches vary, but essentially this means using the industry average salary or wage for a particular role as the benchmark for your own compensation decisions. Netflix famously takes this approach to the next level by paying top of market for the person in question. This is an individualised approach also known as "paying the person."

It uses three questions to determine the top-of-market value for a member of their team: (1) What could this person get elsewhere? (2) What would we pay for their replacement? (3) What would we pay to keep this person, if they had a bigger offer elsewhere?

The goal is to consistently keep each employee at the top of their own market value. Sometimes that means large or frequent raises. Sometimes that means reduced pay. Unlike a typical market-based model, Netflix is actually sceptical of using titles or roles to determine the market, as "all people with the title ‘Director of Engineering’ are not equally effective."

Paying top of market is great, but in many cases it’s still dependent on a manager interpreting someone’s value from their singular perspective.

One potential solution is formulaic pay, an approach that organizations such as Buffer and Stack Overflow have adopted publicly in recent years. By visiting their websites and entering a few variables such as the role you’re considering, your level of experience, and your location, you can calculate the salary you’d earn if you worked there.

By design this is a take-it-or-leave-it offer. Once you’ve gone through their recruiting process and your variables are firmly in place, there’s no room for negotiation. You’ll be paid the same as everyone else at your level.

This is how the formulaic approach reduces bias; historically marginalised people negotiate less aggressively than their counterparts. This can be challenging for candidates used to pushing for more, but it’s a philosophical commitment that doesn’t work with exceptions.

While this approach represents an improvement over the status quo, it runs the risk of oversimplifying an inherently complex topic. How do we know seven salary bands is the right number? And is it possible to balance the quality of life by calibrating salaries to cities? These and other questions taunt us.

If formulaic pay is too reductive and market-based pay is too preferential, what’s left? Letting employees set their own salaries. This radical notion captured the imagination of a handful of early adopters that have been enabling this for decades.

At Morning Star, the world’s largest tomato processor, employees take part in an annual ritual where they write their own job descriptions and set their own pay. Using internal and external compensation data, the firm’s financials, and their role mix, they craft a recommendation for their salary or wage for the year ahead. Next, an elected compensation committee made up of their colleagues reviews these proposals and provides feedback in the form of advice.

Some employees are advised to soften their ask—perhaps their track record doesn’t support such a big raise, or the market is softening and the firm needs to be careful with expenses. Others are encouraged to reach higher; they may have undervalued their contribution.

The advice is just that—guidance that employees can heed or not. Most do. And a conflict-resolution process does exist for any extreme outliers, but this is rarely needed. The transparency around compensation is sufficient for most people to make sound decisions that can withstand the scrutiny of their peers.

As eccentric as this sounds, this transformative practice is gaining traction. In addition to Morning Star, organizations such as Semco, Bruggink & Van der Velden (BvdV), Incentro, Hanno, elbdudler, Premium-Cola, and AES have all allowed employees to set their own salaries without breaking the bank (and in many cases outperforming their peers). But beyond that, the benefits in financial acumen, stewardship, and collective responsibility that this approach produces are unparalleled.

Is self-set pay right for you and your company? It might be time to find out. As is always the case, the early adopters will inherit some remarkable advantages. Not to mention some remarkable people.

Portions of this article were excerpted from Brave New Work, by Aaron Dignan, published by Penguin Books. Aaron Dignan is founder of global transformation firm The Ready.

Image credit: Rawpixel.com

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