Figuring out how much to pay each employee is a difficult and often drama-filled process. Here's a better way.
When my business really started growing, we went from a handful of people to several teams in multiple cities--and the complexity grew just as quickly.
The big challenge was compensation. As a technology company, we were in a very competitive market. Salaries were high. If we didn't get people's compensation right, they would turn down offers or worse, leave the company for our competitors.
To make things worse, with constantly changing market rates, an offer for a given role could go up 10 percent in just six months. Trying to come up with new offers and deal with constant salary review request was taking up a huge amount of time and leading to more and more drama.
In 2009, I was reading about open book management and floated the idea of having an open payscale to the rest of the company's leadership. Collectively, we decided to give it a try.
We developed a model of five major pay levels each with three minor levels. We then mapped all of the roles based on skills and experience to these levels. This gave us the flexibility to deal with nuanced situations, but also provided us with a clear structure.
The hard part was the implementation. Since we had people all over the map, we had to map existing staff to the scale. We immediately changed the pay of any employee who, it turned out, we'd been underpaying. For people who were overpaid, we froze their salaries until everyone else caught up.
Then, we published the scale to the company. Everyone could see how they fit into the system, what the next rung was, and what they needed to do to reach that next level. We moved to a quarterly review process, which spread out the load across the year. We also added annual cost-of-living adjustments and checked our scale against industry and market rates every other year.
I recommend this system now to many companies I coach because I've discovered these five distinct benefits from using it myself:
1. Simplifies the compensation review process.
By having a set schedule mapped to roles and levels, the compensation review process was easier. We reviewed a person's level of performance, decided if they met the conditions of the next level, and adjusted them accordingly.
At times, we facilitated a partial move if someone was close. Then we would split the difference between the levels for a period of time while they worked their way up.
2. Focuses on role performance, not negotiation skill
The other nice thing was that it removed the negotiation process altogether because level descriptions and salaries were more objective. We didn't have to come up with justifications for how much to pay someone; we just looked it up.
If someone tried to argue for a higher rate, we just pointed to the table and asked them if they met the criteria. We saved a lot of time, energy, and drama.
3. Provides a clear path for future growth
Another benefit of having the pay scale published was that it gave people a clear path for their future. They could see what it took to get to the next level and what that level would pay them.
We also published the market rate reviews we did and showed them how we stacked against the general market. So, while they might have been able to get someone to give them a bump in salary to make a move, they knew it probably wouldn't last and would eventually revert to what the market would bear.
4. Reduces gender and racial biases
Having clear role descriptions and scales made bias less likely whenever we interviewed job candidates. We stopped asking what people were making previously, and instead focused on where they could perform within our organization. It reduced the risk that we might have continued to rely on our previous bias in regards to compensation.
5. Creates transparency and accountability
Having an open pay scale fit with our cultural values of transparency and accountability. This built trust and respect between management and staff because nothing was hidden and people knew where everyone stood. It also increased accountability because people knew the performance levels for each role.
Many companies keep salary hidden. They generally do so to have power and control in the negotiation process. Unfortunately, it becomes a burden that only leads to mistrust and confusion.
Instead, create a fair compensation system so you can focus on what's really important: the business.
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