“When I was a CEO, the annual pay review would cause my heart to sink. In fact, I was often heard muttering that, as annual projects went, it won hands down in being the greatest amount of work to make the fewest people happy.”
Reward Gateway was still small – 400 people – so the executive team could get together and, with some help from managers, could consider everyone in the company in a single spreadsheet over a handful of days and a few iterations. Fairness was always our priority, although it was rarely an outcome that we were universally successful at achieving.
Now most companies would claim to want to pay people fairly. Larger firms often go to extravagant lengths to attempt to codify this process with pay grades and complex salary frameworks. Jobs are evaluated and attempts are made to fairly categorise roles in widely disparate parts of the organisation – often with varying degrees of success. Creation of pay scales and frameworks may look like a science, but the positioning of people within them is definitely an art.
“But the dirty little secret at the heart of pay review is this: in pay strategy, we have a no-win choice to make. We can pay people fairly, comparing roles within an organisation, or we can pay the market rate for a position – but we can’t do both, simply because the market rate isn’t necessarily fair.”
The truth is, market pay rates aren’t based on fairness. They’re not based on value creation, stress levels, output, remit, responsibility or any of the other things you might think should justify a higher salary. They’re based on that brutally simple economic principle: the law of supply and demand. If there are lots of people qualified and experienced to do a job, the price of that experience goes down. Likewise, if there are fewer experienced people, then the price of that experience goes up. The market rate for a role has no connection with the value created for the employer, except when the rate for a role exceeds the value the company thinks it will get from it – in which case, the role is deemed economically unviable and is cancelled.
This conundrum vexes executives and people in charge of pay strategy no end. It’s a circle that is seemingly impossible to square. And it readily manifests itself as unfairness in practice – corporate staff already in roles get annual raises that their managers think are fair, reasonable and in line with other roles in the organisation. But then the team needs to get bigger, a hire is made from outside and suddenly the company finds the market rate for the role is out of kilter with what is being paid internally. It takes a brave leader – and a rare one, with the available money – to swoop in and increase the rate of pay of everyone in the company who is now thought to be underpaid compared to this new hire.
When it comes to what workers want themselves, naturally, they want both – they want to know that their work and level of responsibility is valued fairly compared to other people in the organisation with similar skills and responsibilities, even when they’re in different departments. But they also feel a real sense of injustice when a recruiter calls them up and stakes a claim that the company is taking advantage of them and they could be earning 20 per cent more elsewhere (a claim that recruiters find easy to make and often hurl about with reckless abandon).
The gap between internal and external salary perspective was brought into focus recently by research from The Resolution Foundation which showed that pay growth for people moving between companies had risen to the highest level for more than a decade. The research found that annual pay growth for the vast majority of people who stayed with their employer was 2.5 per cent. People who switched employers, however, did four times better, averaging an 11 per cent pay rise. Some commentators are calling this a “disloyalty bonus”, where job movers fare better than people staying with their employer.
Of course, some of this will be down to people changing companies and taking a step up in their career, too – taking on a new role with more responsibility or more clients, or deploying greater skills and experience than the one they’re leaving. But the research suggests that this only explains part of the difference.
The more I’ve thought about this over the years, the more I’ve realised that universal pay transparency is the only real way forward. It’s the opposite of what most companies do, and the idea of publishing a public list of staff salaries would make most HR leaders turn pale, not to mention being considered an invasion of privacy for some. But it is something that I was asked by my young, questioning workforce many times.
The original Reward Gateway staff contract actually made it a disciplinary offence to discuss or reveal your personal salary. That had no effect, naturally – people discussed their salaries anyway. It was a heavy-handed, unpleasant approach that I’m now quite ashamed of – not our finest HR hour. We scrapped it several ago.
“But when asked by staff why salaries are supposed to be confidential, I’ve never really come up with a good answer.”
In a fair and just pay situation, it should be possible to explain to each and every member of staff why someone they know gets paid more than them and what they need to do, change or develop in order to get there themselves. Wouldn’t that be the grown-up thing to do? My best, most honest answer to why we didn’t do that is that we lacked the management capacity, training and experience to have 400 conversations like that, even though I personally can’t come up with a good argument against it.
Some companies are really leading the way, bravely shining a light into what a future might look like if the mysteries and vagueness of pay and compensation were taken off the table. Buffer Inc, the US-headquartered social media management software company, has made openness and transparency a defining feature of its culture for some years. Its British CEO, Joel Gascoigne, believes that transparent, openly published salaries breed high trust in the team, while holding the company accountable to paying people “fairly, equitably, and without bias”. Its salary formula and a full spreadsheet detailing exactly how much each of their 65 staff earns is online and updated constantly. It’s an approach that seems to be working – Buffer enjoys a 4.8-star rating on Glassdoor, while Joel himself has a CEO approval rating of 100 per cent.
And there are others – a small band of companies is starting to interpret the salary relationship differently. Basecamp, another technology firm, has no negotiated salaries or raises. Everyone in the same role at the same level is paid the same with a simple promise of “equal work, equal pay”. Their target is to pay everyone in the 95th percentile or top 5 per cent of the market, regardless of role or department. They are open about where they get their market rates from and how they are used.
Again, the results seem promising – average tenure for developers in tech startups can be as low as 12 months, but Basecamp manages over five years. There are also pay transparency experiments going on at organisations as large as Whole Foods – with its 91,000 staff – and as small as software developer Hanno, which employs just 14 people who operate as a collective and set their own salaries.
Culturally and organisationally, I think we’ve got some way to go before many people will feel comfortable – or even able – to consider a truly transparent way of handling pay. But the more I discuss it openly, the more I think the current way we do things just doesn’t really work. They say that sunlight is the best disinfectant, and ultimately, if we want our staff to really come and give their whole, weird selves to their jobs, I think we’re going to have to rethink this whole approach. Maybe we all need to follow Buffer, Basecamp and the others into their brave, new, open world.
This is an improved version of my original article of the same name which was published on 19th August 2018. The super talented Rebecca Hastings helped me make this version just a little bit better.
Glenn Elliott is a technology entrepreneur, investor and advisor, MBA drop-out and recovering CEO with 20 years of experience. His bestselling book Build it: The Rebel Playbook for Employee Engagement is published by Wiley. He writes about people, culture, leadership, technology and the future of work weekly at www.glennelliott.me.
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