• Klaus Wuestefeld

Team-Set Salaries (TSS)

Updated: May 19



Team-Set Salaries (TSS) is a next-generation compensation process that uses an elegant algorithm to solve the key problem in people management today:

How do we set fair compensation for individuals in multiskilled, collaborative teams?

TSS is:

  • Fair - Results are not only fair, but also perceived by the team as being fair.

  • Actionable - TSS produces a precise numerical result for each person’s compensation.

  • Collaborative - Appraisals are made by team members themselves.

  • Easy-to-use - Team members take only 15 minutes each to carefully express their appraisal of their colleagues’ work.

It is used to set salaries, share bonuses and even to distribute company equity.

TSS is used by teams in both hierarchical and horizontal companies. It fixes the lack of good compensation solutions in systems such as Holacracy, Sociocracy, Teal and Management 3.0.

It provides fair, actionable, individual performance appraisal for multiskilled teams with minimal overhead for managers and team members.


The Problem with Traditional 360-Degree Reviews

For compensation purposes, the questionnaires used in traditional peer review processes, such as 360-degree reviews, boil down to asking “Should this person get a raise?”.

Asking that question is fundamentally flawed, if not downright cruel.

When team members are asked whether each colleague should get a raise, the answer is always that many more people should get raises than the company can afford. They set high expectations and end up frustrated every time.

This “review inflation” effect of traditional peer-reviews is inevitable because it stems precisely from the traits that we work hard to foster in our teams: optimism, ambition, friendship and collaboration.






Peer appraisal chart published by a team of consultants at Novatec. Each line represents a team member and each “X” marks a colleague’s vote for their new salary. Clustering of votes on the right side shows the inevitable review inflation effect of traditional peer reviews. The session “was a very positive experience”, of course, but giving everyone a raise every time, is simply not sustainable.




Managers then have to subjectively moderate those reviews, leaving people to wonder why they took the time to do them in the first place.

Within larger teams composed of several subteams, in attempts to make up for different rating styles among managers, compensation committees or circles are created to further “force” or “calibrate” their teams’ reviews as a whole.

Managers waste time, the team’s perception of fairness is undermined, morale drops, employee turnover remains high and company results suffer.


Asking the Right Question

Instead of asking "Who should get raises?", the question we need to ask team members is: “How much of the pie does each person deserve?”.

Asking how we should share the compensation budget (how we should slice the pie) embraces its finite nature and is the only question that will give us a clear, actionable answer.

By using this approach, the company eliminates the review inflation effect of traditional peer-review processes, described above. When someone states a certain colleague deserves a greater slice of the pie, they are also stating that others deserve less, and vice-versa. In this manner, the team can no longer decide that "everyone deserves a raise”.

Merit Money, a playful practice from Management 3.0, is an example in which team members also distribute a finite amount of money among peers. What Merit Money can do with a small bonus to promote feedback, TSS can do with actual remuneration to promote justice.


Clear Actionable Result

The result of the TSS process is the fair share of the compensation pie that each member deserves, in the team’s collective opinion.


Setting Individual Compensation

Managers (or compensation circles in flat organizations) use the generated TSS result as a fair basis for decisions, such as dismissals and salary raises.

By comparing the TSS percentage for a particular team member to the percentage of the total payroll budget actually paid to that person, managers can easily analyse and adjust wage increases or bonuses.

Suppose a team member called Jamie is currently paid 15% of the team’s compensation budget. The TSS result above shows Jamie deserves 21.2%. So, if Jamie keeps up this result consistently over time, when the company approves a budget raise for her team, she can get the appropriate salary raise.

Suppose Alex, on the other hand, is currently paid 18% of the team’s compensation budget but the TSS result shows Alex deserves only 12.3%. Either the team needs to find a way to better apply Alex’s potential or he actually deserves much less than he is currently paid, in the team’s collective opinion. In that case, if the company ever needs to let people go, Alex is a possible candidate for dismissal. At the very least, Alex will not be given an unfair raise. The TSS result makes it clear to Alex’s manager that giving him a raise would cause resentment within the team.

The TSS result provides a sound basis for compensation decisions, while managers only need to intervene surgically and strategically.


How it Works

Periodically, the team carries out TSS round, in which each team member independently appraises their peers’ contributions, expressing what a fair slicing of the pie would be in their opinion.


In this example, dragging a person up means that their contribution is worth more compared to others’. Dragging them down means their contribution is worth less.

Each level represents a 1.2x difference in appraisal. Other values were tested. This factor of 1.2 is simply the factor found to be the most intuitive for users after having experimented with many options over the years.

Therefore, in the example above, the appraiser is indicating that, in their opinion, Jamie deserves 1.2x more than Kelly, that Kelly deserves the same as Kim and that Alex deserves 1.2x less than Sidney and André. A two-level difference, consequently, means a 1.44x difference in appraisal.

Only 4 levels are shown here, but there is no limit to how many levels a team can use.


Frequency

Stable teams can carry out TSS rounds once a year. Dynamic teams, with new members joining, do so every quarter to track the progress of these new members.


Certainty Factor

Appraisers specify a certainty factor for each appraisal, ranging from zero to one, indicating how well they know that colleague’s work. The blue squares in the animation above indicate the certainty factor.

The lower the certainty, the less that appraisal will influence that colleague's TSS result.

Appraisers don’t appraise colleagues they don’t know. Specifying a certainty of zero is the same as not doing an appraisal and will not influence that colleague’s result. Specifying a certainty of one means you know their work very well and are 100% certain of your appraisal.


15 Minutes

People's opinions about their colleagues' work is formed naturally, on a day-to-day basis, every time they have a work interaction. That is how our brains are wired.

15 minutes is all the time people need, not to form, but to carefully express those appraisals using a straightforward, intuitive representation.


Fairness

Many people feel uncomfortable, at first, being compared to their colleagues, but

the only way we can experience fairness is by comparing our colleagues’ contributions to what they are actually paid.

Publishing results with people grouped into levels, rather than an individual ranking, helps eliminate unnecessary comparison.

Trying to escape comparisons altogether was a trendy management fallacy of the mid-2010s that simply stacked subjective salary setting onto managers’ responsibilities.

TSS, in contrast, is an opinionated process that favors transparency, team autonomy and fairness.



Looking Under the Hood

So far, we have discussed everything a team member needs to know in order to use TSS effectively. It can be summarized in a phrase: Team members appraise their colleagues using intuitive comparisons and, by balancing those appraisals, a fair slicing of the pie ensues.

Below, we shall take a look at the “magic” that happens under the hood and discuss more sophisticated insights revealed by TSS.


Calculating the Result

Every team member has a different and incomplete perspective, a different opinion on what a fair slicing for the team should look like.

TSS leverages this diversity to produce the fairest possible slicing.

As an example, here are the appraisals made by Sidney. For each appraisal, we calculate what the difference is, in levels, between her opinion and the TSS result:



Above, in the calculated “Difference in Opinion” column, we can see that Alex and Jamie, who have a positive difference in her opinion, deserve more than the TSS result. Andre and Kim, who have a negative difference in her opinion, on the other hand, deserve less. Those differences take the certainty factor into account.

It is important to note that the sum of all Sidney’s differences is zero, meaning they are perfectly balanced out.

Here are the appraisals received by Sidney:



They are perfectly balanced out as well: the total of differences in opinion is zero.

The TSS result is calculated as the slice distribution that perfectly balances all differences in opinion, of all the appraisers and all the appraised simultaneously.

The TSS algorithm finally enables us to have a fair, numerical result, calculated directly from peer appraisals. No other process made that possible before.


Cheat Detection

Two people or a small group may attempt to cheat by agreeing to appraise each other more favorably to get better results.

Such an attempt becomes immediately visible in the calculated "Difference in Opinion" column of the appraisals report, like Sidney's above. Differences of up to half a level, positive or negative, are quite normal. Differences greater than one level may call for a chat with the appraiser.

People often have valid reasons for disagreeing significantly. That is fine. If not, they might be cheating or might have made a mistake in their appraisals.

Even though the appraisals report shows the actual difference in opinion, the TSS algorithm internally limits the difference in opinion of each appraisal to half a level, positive or negative, to avoid outliers. That ensures the result is a collaborative effort and not over-influenced by any single person.

Reliability

TSS will indicate the reliability of the result for each team member.


The chart above displays this reliability in a real 30-person team.

Notoriety, in brown, is the sum of the certainties of the appraisals each team member has received. Ten appraisals with a certainty factor of 0.6, for example, add up to a notoriety value of 6.

Notoriety gives us an indication of how well the team knows that person’s work, or in other words, how reliable the TSS result is for that person. As a manager, there is no need to make any important decisions regarding a new team member, like dismissing them or giving them a big raise, if their notoriety is less than 2. The team should be allowed more time to get to know that person’s work better.

In the team above, the average notoriety was 14. That is equivalent to getting 14 colleagues to appraise each team member with 100% certainty. In traditional peer review processes that is not economically feasible, but it is a typical value for teams using TSS.

Knowledge, in green, on the other hand, is the sum of the certainties of the appraisals made by that person and indicates how well that person knows the team. A low value for a senior team member indicates that person probably did not have time or forgot to do their appraisals. Conversely, a disproportionately high value for a new team member indicates they probably did not understand how to do them.


Feedback and Talent Development

TSS provides precise numerical feedback and does not interfere with the team’s qualitative feedback process for talent development.

Companies can make use of any additional feedback and improvement process they desire. With TSS, talent development is a completely independent process, eliminating the constant temptation of tying it to remuneration.

In teams that use Feedback Canvas, for example, those who would like the richest feedback can invite to their session the appraisers who have the largest differences in opinion about their work (e.g.: Kelly and André in the table above).


Limitations

To use any peer appraisal process there needs to be trust and respect among team members.

Minor dysfunctions, such as occasional cheating, will become visible in the TSS results and can be addressed by the team. But if a team, as a whole, discriminates against someone or if the group contains factions that will outright weaponize appraisals against each other, for instance, TSS will not solve these problems.

Furthermore, there should be no large empty gaps (more than two or three empty levels) in compensation value among team members. A team composed of only a few renowned professionals and a few junior interns, for example, should split their team into two separate TSS rounds due to the large gap between both groups. A team can easily span more than a dozen levels as long as there are people in most of them. If people are too far apart, appraisers have a hard time comparing them and will tend to underestimate the gap.

Lastly, if a team is divided into subteams, managers may include all in the same TSS round only if they are connected enough. That means each subteam should have at least 3 or 4 people receiving appraisals from people in other subteams. Otherwise, managers should choose to hold a separate TSS round for each subteam.





Graph displaying the appraisals (connections) among people in different subteams.











There is no limit to the size of the team, as long as subteams are sufficiently connected.






Above is the TSS result published by a real 30-person team. This team comprises 6 subteams and results range from nearly 5% of the pie down to 2%. Calibration of different managers’ reviews across subteams is not necessary in their case because sufficient interconnection allows TSS results to span all subteams in the same round.


Market Adoption

In 2002, as our team was growing, ad-hoc salary negotiation was becoming quite a problem for a fellow manager and me at our company, Objective Solutions. We were managing sixty software developers in several project teams, across offices in two major cities.

After creating and using TSS, compensation became a non-issue. We had more time to focus on useful things such as hiring and onboarding, as well as planning conferences at resorts for the entire team. The company is 350-strong today.

In 2014, a second digital products company called HE:labs started using TSS, which drew my attention and led me to joining them as a partner the following year. Fifty people including the CEO, salespeople, designers, developers, interns and managers participated in TSS rounds for several years, until the company was split into two smaller spinoffs.

In 2018, Webgoal started using TSS with employees across several project teams.

Over a two-year period, they achieved a 66% reduction in employee turnover.

Org transformation leader, The Ready, implemented a TSS round once a year to distribute equity in the company itself.

In 2019 we made the process available through the Percival web app and in 2020 we gave the process its name (TSS).

Copersucar - the world's largest sugar and ethanol company - in addition to various other companies from software developers to plastics industries, began to employ TSS within their most innovative and multidisciplinary teams.


Getting Started

TSS is so straightforward and non-intrusive that companies often begin using the Percival web app in parallel with their extant compensation processes.

In hierarchical organizations, results are normally kept for managers’ eyes only, at first. As they gain confidence and their use of TSS matures, they can opt to start sharing the results with the team, closing the feedback loop and gaining transparency.

In horizontal companies, TSS results can be used directly or as input to compensation circles in systems such as Sociocracy, Holacracy, Teal and to Management 3.0’s formula-based salaries.

Companies then, in due time, shed the parts of the old processes that have become obsolete with the adoption of TSS.


Conclusion

Team-Set Salaries (TSS) is a lightweight process for compensation setting in multiskilled teams. It is not only fair, but perceived by its users as being fair.

With only a few minutes of a team’s time, TSS produces the distribution of slices of the compensation budget that is fair in the team’s collective opinion.

Managers and flat organizations use TSS as a sound basis for compensation decisions, ultimately leading to a heightened sense of fairness, improved employee engagement and superior company results.



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