Choose Your Salary
– Remove taboo and introduce rationale.
Arguably, Semco’s most controversial initiative is to let its employees set their own salaries. Pundits are quick to bring up their dim view of human nature, on the assumption that people will obviously set their salaries much higher than feasible. It’s the same argument we hear about people setting their own work schedules in a seven-day weekend mode. The first thing that leaps to mind is that people will come as late or little as possible—and this has never been our experience.
IN A NUTSHELL
The secrecy that surrounds what employees of an organization get paid is legendary in its power to create disengagement. In fact, a PayScale survey of over 71,000 employees proved to be quite eye-opening about the effect pay secrecy has on employee engagement. A whopping 82 percent of employees reported they would be okay with being underpaid as long as they knew why. Two-thirds of survey respondents felt their employer was not paying them the market rate, even though they claimed to do so. And a staggering 60 percent of employees who felt like they were underpaid reported they might quit their jobs soon.
The taboo that surrounds conversations on pay is a form of organizational paternalism. It stems from companies refusing to treat their employees as adults and misguidedly limiting their autonomy. Managers often believe that their employees don’t want coworkers to get wind of how much they earn. And, they’ve been conditioned to think that having an open conversation about pay might lead to people making “irrational” decisions, like quitting. In the end, employees feel like they’re being controlled by an invisible hand while managers wrongly assume they’re doing whatever’s best for their people.
However, a number of companies like Buffer, SumAll and WholeFoods and have shown that it is possible to do away with pay secrecy. That open access to relevant information can actually drive up engagement and positively impact culture. And Semco is one of the pioneers when it comes to transparency around salaries. For more than three decades now, Semco employees have been setting their own salaries, based on salary ranges derived from market research done by a trustworthy external partner. It was a practice that raised a lot of eyebrows when it was first introduced but, in the end, it brought about a tremendous impact on Semco’s already unique culture.
Allow employees to choose their own salary as long as they can rationally justify it.
Apart from the huge impact it can have on company culture, allowing people to set their own salaries is a great opportunity to educate as well. People often feel like they’re underpaid, but they don’t have any real numbers against which they can compare their pay. When a company makes the (huge) effort to collate data and provide salary ranges or the average market rate for every position, it’s bound to dramatically improve productivity and engagement. Employees feel empowered because they now have all the information needed to assess whether or not their salary is fair.
Get your management onboard: Before introducing such an initiative, make sure you have your managers onboard because it’s going to place a huge demand on their time, efforts and resources. A lot of them might be skeptical, so you need to make them see the clear impact it will have on productivity and company culture.
Get consensus on competitors to be researched: Before engaging an external partner to map the salary ranges for different positions, there needs to be consensus on the group of companies to be researched by the external partner. Both employees and the management should have a say on which competitors are included in the study.
Engage a trustworthy external partner: The external partner should provide the average market rate for each position, after mapping the industry and the chosen set of competitors. It’s extremely important that the salary ranges you provide employees are well-researched and credible.
Discuss results in one-on-one sessions: Invite each employee to a one-on-one session and review the average salary range for their particular position. Ask them questions like, “How do you see your pay in light of this new information?” or, “Do you think your current salary is fair or is it something you feel needs to be adjusted?”
Let employees choose their salaries: Allow employees access to the whole information and create a safe space for them to review their pay according to the data provided. For instance, if the salary range for a position was pegged at $2800-$3500 and the employee was getting paid only $2500, they could choose to have their salary raised to $3000-$3200. But the employee can’t be allowed to choose $5000 as their new salary. Irrational salary raises should be non-negotiable.
Adjust large gaps by spreading out raises: If an employee is getting paid much lesser than the market range, then adjust the pay gap by spreading out the raise over fixed and variable components (like bonuses based on results) of their salary. For instance, if earlier they had one month’s salary offered as a bonus when results were achieved, raise the bonus to 1.5 or 2 months’ salary after this exercise.
Educate employees on the current state of market: The exercise shouldn’t be just about increasing or decreasing salaries according to market averages. Instead, make it an opportunity to discuss and justify decisions taken – either to increase, maintain or, in some rare cases, decrease pay. Use the material put together by the external partner to move it beyond an internal negotiation on salaries between management and employees. Make an effort to be transparent and to educate people on what they are likely to be offered, if they quit their job today. Help people see that sometimes the pay they’ve been offered has more to do with the position itself than their performance or themselves.
Level to implement
Material on market averages should come from a trustworthy external partner
Bring transparency into the discussion
Have one-on-one chats to create a safe space for people to express how they feel
Use concrete arguments and rationales to defend your case
Offer collective raises or adjustments instead of keeping it customized
Force people to accept anything without proper justification
Feel pressurized to oblige anyone after they’ve been allowed to review their pay
Have any hidden agenda or further the taboo surrounding salaries
Employees can align their salary levels with the market
Minimize any potential gaps in pay
Transparent and open conversation on dissatisfaction over pay
Company can show its inclination to setting things right and acting fairly
Opportunity to educate employees on market realities and their possibilities in terms of pay
Do away with the guesswork that surrounds salaries
Removal of taboo around the topic of salaries
Demands high levels of time, energy and effort from company management
Investment on the external partner for research can be expensive
Even after the exercise, there might be some people who are still dissatisfied with their pay
About thirty years ago, when the practice of allowing employees to set their own salaries, based on industry benchmarks, was implemented, Jose Violi, a Semco employee, took everyone by surprise. The market research showed that his pay was well below the market average for his position and the company wanted to give him a raise to close the gap. However, he declined their offer saying he was perfectly happy and comfortable with his current salary. Despite the management insisting upon giving him the raise, he was the only employee who refused to accept it. Today, he is one of the main shareholders of the Semco Partners Holding.
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