• Klaus Wuestefeld

The Myth of Self-Set Salaries

Updated: May 19

There's nothing sexier for a company's employer branding than to state it makes use of Self-Set Salaries. In other words, to state that each employee is able to set their own compensation.

It's actually not quite like that.

At companies which make use of Self-Set Salaries, there is a formal peer advising process as to the desired salary values. Subsequently there will be a defense before a committee that can veto the employee's salary proposal.

Charles Towers-Clark, CEO at Pod Group, warns a person who'd proposed a 50% raise in their own salary: “you can take it but if you become uneconomical or your value is not justified then that will only end one way”. Understanding the threat posed by Charles of being let go, that person reduced what they were asking for.

“If you become uneconomical or your value is not justified then that will only end one way”

Evgeny Shadchnev, founder and CEO at Makers Academy, has a point of view similar to Charles', claiming that making such a high salary might go against the employee's own best interests, considering their workmates expectations will grow accordingly. Also, trust and respect can easily be lost in case they feel performance is not compatible with the new compensation. Instead of being ruled by open negotiation, we can see one's salary is regulated by resentment and peer pressure.

In addition, Evgeny acknowledges that the advising process for salaries demands much time and effort, which requires Makers to grant an up-to-two-days leave a year for every employee to write their own proposal so that the process can be carried out. The process is made up of no less than 7 steps.

At Smarkets, salary reviews are performed every six months and an employee who wishes to earn a raise must build their business case comprehending a new salary proposal based on performance, market rates and peer feedback, which will be evaluated by peers and HR. The process ends when a deal is settled but the negotiation period might still be extended, which is perceived as a great disadvantage.

The illusion of Self-Set Salaries was created to meet the wish for autonomy and transparency in compensation processes and also the need for companies using systems such as Teal, Holacracy and flat hierarchy to set salaries without centralizing the decision-making.

Transparency in the process of compensation is, in fact, a fundamental aspect in fostering the team's sense of justice and, consequently, in improving levels of engagement and reducing turnover, as we have seen in this article. To state, however, that it is possible to use a method in which salaries are ”self-set” is a huge myth, considering that the team is the de facto regulator of limits to what is acceptable when it comes to salaries.

There is nothing wrong with making use of a negotiation process involving a committee or compensation circle. The problem comes with misleading people, making them believe that they are the ones to set their own salaries.

Can we have a compensation process which is autonomous, transparent and fair, without being as complicated and time-consuming as Self-Set Salaries?

The answer is a simple, effective process called Team-Set Salaries (TSS), which allows each team member to express their appraisal on the contribution of each colleague. By applying an elegant algorithm to these appraisals, the TSS process yields an actionable, numerical result that enables fairer salary-related decisions. The process allows the whole team to participate and requires only a few minutes of each one of its members.

By using TSS the company treats its people as adults with autonomy to set fair individual compensation by collaboratively dividing a fixed salary budget.

Learn more about the Team-Set Salaries process in this article and make your compensation processes easier, while sustaining collaboration, fairness and transparency.