Life may not be fair, but employee compensation should be — and employees need to be confident it is. If not, you can expect increased turnover and a breakdown of trust between your employees and the company.
The old approach to compensation, with closed-door negotiations and MI6-level secrecy, is hardly fair. This is important, because unfairness at work drives employees away. In fact, in a 2017 survery of tech workers from the Kapor Center for Social Impact, 37 percent of respondents said unfairness or mistreatment was a key reason why they had left a job in the last three years. Even if they stay, employees who feel the company is acting unfairly will stop trusting the organization. When that trust disappears, so does motivation. That leads to lower performance and a disconnect from your company’s mission.
Basing pay only on performance — not on bargaining moxie or tenure — and making salary information transparent removes bias and assures employees they’re being compensated fairly.
A Growing Movement
Anecdotal evidence from companies that have already adopted transparent salaries shows the policy makes employees more satisfied and productive; on the flip side, companies such as Uber, BBC, and Google have come under fire due to perceived gender pay gaps.
In recent times, legislation requiring pay transparency has been gaining steam around the world. Because it may soon become a requirement, it’s worth adopting transparency ahead of the game and on your own terms. This, among other reasons, is why we’ve made salaries and output levels transparent at Chewse. Even I, as the company leader, am not immune: My output level is set by the board, and my full compensation (including equity ownership) is accessible to everyone.
Building a Fairer Compensation Model
A transparent salary structure involves two main components. First, salaries must be based on a formula that judges performance. At Chewse, we look at output levels and rank them from A through G. Next, salaries must be open, with everyone able to see everyone else’s compensation — including executive leaders’.
With a compensation formula based on performance, you reward employees for their ability to produce results. Nothing else matters. This levels the playing field for women and people of color, who can be at a disadvantage during salary negotiations. Performance-based pay also ties everyone’s salary to the fairest criterion possible — output — while giving employees a clear road map for advancement.
When everyone is privy to everyone else’s compensation level, managers and leaders are held more accountable. Leaders simply cannot make exceptions in an open salary system. This level of transparency also fosters an open environment where employees can candidly talk with their managers about how their output levels align with their perceptions of the value they add.
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How to Transition to Open Salaries
When we instituted transparent salaries at Chewse, I was terrified to share the spreadsheet containing everyone’s compensation. Even though people were nervous about the move, some never even looked at the spreadsheet after I sent it! They said it was nice just knowing it existed, proving that trust is really the crux of the matter.
Opening up your compensation numbers will be a stressful and bumpy ride, more so for established companies than startups, but the growing pains are worth it. Being intentional about building an open salary system will set the stage for future success. Here’s how you pull it off:
1. Get Leadership Buy-In
Unless leaders fully support the move, it’s never going to work. Commitment to the principle of transparency is a must. The transition requires a lot of upfront work and can cause a bit of chaos, but let’s be clear: The investment may not be easy in the short term, but it’s well worth it in the long term.
2. Know the Market
Invest in a market compensation survey tool such as PayScale or Radford. These aren’t cheap, but they give you a sense of what fair market-level compensation looks like by location, role, and title. If your company is large enough, you probably have these tools already anyway.
3. Create a Performance-Based Compensation Formula
Your leveling system should comprise a set of rules and conditions that define what it means to be at certain levels, as well as guidelines for how to advance. To keep the process fair, leave tenure and negotiation ability out of the equation. Train leaders, managers, and employees on what those output levels mean and why they’re valuable.
4. Adjust Your Hiring Process
Communicate salary information up front — we include it in job ads — and make it clear before and during interviews that salaries are not negotiable because of your commitment to transparent and equitable pay.
During the hiring process, provide a range of output levels linked to their resulting salaries to show potential employees the available advancement opportunities and earn their support for the system.
5. Make Space for Regular Performance Reviews
Regular discussions about compensation and performance ensure that no one — not even the shyest or newest worker — will get passed over for raises and advancement. At Chewse, we have conversations about compensation at minimum every 90 days.
6. Roll Out a Communications Plan Early On
Give employees notice that their salaries will be based on performance and will be transparent and open. Along with this advance notice, create space for employees to express fears about what this might mean for their jobs, the company culture, or any other concerns that might arise.
Changing your pay structure to be fair and transparent is not an easy task, but it is absolutely worthwhile. It allows you to steer employees to success rather than leaving them guessing about their performance. Most importantly, open salaries ensure you’re paying people fairly on the basis of what matters most: the actual work they do.