Should employees be allowed to set their own salaries?

Salary decisions are usually made behind closed doors – and only senior executives know the details of who gets paid what. But a small number of European startups are toying with the radical idea that employees should decide their own salary.

Maciej Gałkiewicz, CEO and partner at Ragnarson, introduced politics to his company in 2017, when the team was 20 strong. The company is a software development agency that also has a fund to invest in early impact startups.

“We don’t like the idea that there’s a boss at the top and he makes all the decisions and the employees are supposed to do what they say,” says Galkiewicz. “So in order to give people more authority and a sense of purpose in what they do, we needed to open up all the data and let them make their own decisions.”

The concept of self-set wages is not entirely new. The Brazilian manufacturer Semco – which has implemented this policy since the 1980s – and the American tomato processing company Morning Star are the best known examples. Startups such as Dutch startup Incentro switched to self-set wages five years ago, as did London-based betting exchange Smarkets.

So how does it work? And is it the nightmare that some the founders anticipate?

How do employee-set salaries work?

Prior to introducing self-set salaries, Ragnarson had already “opened up” its budget to employees in 2014 to show them how the company operated financially and educate them about its revenues, costs and profits. Each knew what the other was earning, and the company spent time reviewing the team’s salaries and ironing out any discrepancies.

The company then moved to self-set salaries in 2017, with the aim of delegating more responsibility to employees. At first, the staff was confused, even alarmed. “Their reaction was like, what does this mean? What do you expect from me? So now I can choose my own salary? Are you crazy?” said Galkiewicz.

The process of self-setting of salaries varies from company to company. But typically, the employee spends time researching what others in similar roles are being paid in the broader market. They then create a business case explaining why their pay should be increased based on their performance – and, in Raganarson’s case, how they align with the values ​​of growth, openness and engagement – ​​while taking account of the company’s financial situation.

The employee shares their business case with the entire team and receives feedback on whether what they are asking is fair or not. It could be a formal committee in a large company or just a Slack conversation in a smaller one. Based on this information, the employee then makes the final decision on what their salary should be.

Salaries for new recruits are “negotiated in a standard way”, says Gałkiewicz.

The company has a salary range for each position and will set the individual’s salary within that range based on the candidate’s level of experience.

“People have no idea of ​​the process and how they could position themselves on the ladder, say salaries. But once they join, they can participate in the process like everyone else.

The benefits of letting your staff choose their own salaries

Following in the footsteps of large US companies such as Whole Foods and Buffer, some startups in Europe have experimented transparent salaries — disclosing everyone’s salary internally — to combat the frustration, office gossip and distrust of management that the traditional opaque system can engender.

But for some founders, having transparent salaries is not enough to achieve equality.

“Making salaries transparent is like pinning the payroll to a wall in a shared space. Everyone can see what others are gaining, but if employees think there is an injustice, they have no influence to change that,” says Pawel Brodzinski, CEO of Lunar Logic. The company introduced a self-set salary policy at the company – now 35 employees – in 2014.

Pawel Brodzinski, CEO of Lunar Logic

With self-set salaries, everyone is in control. There are “no closed-door negotiations that promote the best negotiators, or the most successful ones,” Brodzinski says, and there is a lot less frustration.

“As the whole process is transparent, the rules of the game are clear for everyone. That doesn’t mean frustration doesn’t happen at all, but it’s much more manageable than in a traditional system,” he adds.

Another benefit of self-set salaries is that employees gain a better understanding of how compensation affects the overall economics of an organization, and they also gain personal financial skills.

“People understand how the market values ​​their skills and how they should position themselves among their peers,” says Gałkiewicz. “It also inspires people, for example, to start saving money or investing money, because talking about it openly means that (employees) can learn from each other.”

The inconvenients

For 360Learning, a collaborative learning platform, the concept of allowing employees to set their own salaries is highly problematic. He believes the process breeds injustice and allows those with the best negotiation skills – who are statistically Men — to get the best deal, contributing to the gender pay gap. (Although Brodzinski says a happy outcome of the self-set salary process in his case was that Lunar Logic has no gender pay gap and the highest paid people in a given role are generally not men.)

360Learning has, since 2019, removed all negotiation with employees from its salary process and instead uses pay bands – which are calculated using market rate data for each job.

“If people don’t agree, they can leave,” CEO Nick Hernandez says, though few employees have complained about the process so far.

Hernandez says that managers and employees like not having the “bargaining burden” placed on them when it’s time to adjust salaries, because those conversations are usually uncomfortable for both parties. The system works, he adds, because it has consciously built a culture where people don’t necessarily need to have “the loudest voice” to succeed, but are nonetheless smart, thoughtful people who are happy to work independently.

Gałkiewicz agrees that self-set salaries have their downsides, especially when it comes to securing talent. If salaries are hidden from employees and a candidate a company really wants to hire is asking 30% more than the offer, it can afford to make a few exceptions.

“But if (wages) are open, you can’t make exceptions all the time because employees won’t feel like they’re being treated fairly, which can be problematic for employers,” says -he.

Although, he argues, it’s just a matter of defining, as a team, your approach to this problem: “Are you a company that can make exceptions in specific circumstances or not?”

Ragnarson is also “introducing certain limitations” to ensure that employees cannot donate whatever prize they imagine. Especially since the majority of the team is made up of software engineers with a hefty price tag.

“We need a budget, and everyone’s expectations have to fit within that budget.”

Salary adjustment with scale

As with any other business process, the self-salary process needs to be adjusted for scale. As a team grows to 100-200 employees, it is logistically impossible for every member of the team to submit comments on one person’s salary, especially since not everyone would know each other and could not comment on the performance of each.

Brodzinski says large companies get around this problem by creating a select committee of employees who aggregate everyone’s salary requests and provide feedback. If employees want to dispute their pay, they are directed to an established dispute resolution process.

However, self-set salaries can only work in an environment where everyone cares about the company and each other, Brodzinski says. It worked for Lunar Logic because they already had a culture where anyone could make a decision — “so if you intern today, you can fire me tomorrow,” Brodzinski says — and actively contribute to the direction the company is taking.

“It’s not about self-set salaries in isolation; it’s more the whole approach”

Having an organization “built around transparency and autonomy” has also helped the company retain talent. “But it’s not about self-set salaries in isolation; it’s more the whole approach,” says Brodzinsky.

One of the biggest hurdles for companies starting this process, according to Gałkiewicz is the mentality of the founder.

“As a founder, it’s very difficult to raise funds, especially as a technology company, and then all of a sudden salaries are one of the biggest costs of the company. They think, ‘If I I have no control over that cost, so it’s going to be a disaster,” says Gałkiewicz.

“That may be true,” he adds, “if you don’t have the right people, or if you don’t educate them — or if the scale of your business isn’t aligned with the level of sophistication of your process. The devil is in the details.”

Miriam Partington is Sifted’s DACH correspondent. It also covers the future of work, co-authors Sifted Startup Life Newsletter and tweets from @mparts_

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