By Friedrich Haag (Own work) CC BY-SA 4.0, via Wikimedia Commons

The August Open Compensation Model for Self-Managed Organizations

Compensation is broken. Here’s how we’re trying to fix it.

Compensation is one of the most broken parts of how organizations operate today, and one of the most entrenched remnants of industrial-era thinking. The established model begins with the prioritization of profit over purpose, pitting capital versus labor. Owners’ ability to manage and maximize profitability is directly enhanced by their ability to control compensation. This has created a widely accepted adversarial compensation culture, in which the owners’ interests are best served by trying to pay employees as little as they can get away with. The result is secrecy, negative intra-team competition, and short-sighted self-interested behavior.

All of this actively hinders an organization’s ability to rally the team to a common purpose and to stimulate rapid learning and adaptivity.

Today, August is sharing v1.0 of our Open Compensation Model. This model seeks to create a foundation for ourselves to enable the collective self-governance of how we compensate our employees, and plant a seed for other organizations who are considering similar approaches. We hope that others will take this, adapt and change it, and share what they learn. We will continue to iterate our own model over the years ahead, and look forward to sharing our own lessons as we grow.

What’s the role of compensation in a purpose-driven organization?

We are purpose-driven. We are also a for-profit business. We believe that being a for-profit company — technically a New York State Benefit Corporation — is the best way for us to cultivate the resources we need to pursue our purpose. First on the list of essential resources is people. Our success depends on the talent and capability of our team. And that ability depends entirely on who’s on our team, and the culture and practices those people create. People are everything.

The people who are best suited to our purpose are fortunate to have a wide range of career opportunities available to them. They could work inside fast-growth startups and leading 21st century corporations. They could chart new territory in research institutions and academia. And they could work for any number of other leading organizational development firms, both big and small.

We count on our organization’s purpose to stand on its own and welcome anyone who feels compelled to help us pursue it, whether or not you’re an August employee. But if we ask someone to pursue our purpose side by side with us as a full-time member of our team, then it’s only fair that the business makes as much of a commitment to the team member as it asks the team member to commit to the business.

Compensation is one critical way that we affirm that mutual commitment. While compensation alone will never be enough, compensation is an important tool to attract and retain the best people for an organization’s mission. At August, we use compensation to help align each team member’s personal and career interests with our collective pursuit of purpose.

Strategy: Fair even over Equal

While both of these things are good, we chose to prioritize fairness even over absolute equality. We’ve seen elsewhere how a perceived lack of fairness can become a cancer inside organizations, breeding resentment and focusing people on personal gain instead of collective success. Equal feels good, making it an attractive default. Also, the two qualities are not mutually exclusive; sometimes fair is equal. But, ultimately we wanted a model that had a straightforward internal logic that would make sense to anyone on the outside and make each team member feel confident that the system was just.

Among the founding team of Alix Zacharias, Clay Parker Jones, Erica Seldin, Mark Raheja, and Mike Arauz, this meant that our starting salaries and equity were not all equal. While all five of us each add a huge amount of value to the team, we did feel that the relative differences in our overall experience and capability should be taken into account. We discussed these differences at length to arrive at this model, and used the ‘Capacity’ variable to reflect a fair quantification. Our commitment to fair even over equal forced us to face a tough issue: our two less experienced members of the team also happen to be women. August believes absolutely that there is no justification for differences in compensation within the same level based on gender. This is why we looked very critically at our own assessment to make sure that the differences within our compensation, which happen to be along gender lines, are a reflection of our collectively-determined differences in capacity, and not a reflection of implicit (or explicit) gender biases. We also expect our differences to level out quickly over the first few years, and our model allows for adjustments to reflect that change.

Strategy: Optimized for the team even over Optimized for each individual

Another innovative approach to compensation within self-managed organizations is completely self-set salaries, where each employee decides for themselves how much they get paid. At Morning Star, a tomato processing company and pioneer of self-management, they enable this self-set approach with the aid of detailed employee accountabilities and a committee of peers who provide advice for you on your salary adjustments.

While this approach has its merits, we want to minimize the opportunity for differences in an individual’s ability or likelihood to negotiate to introduce unintended imbalances across the team. We’ve seen before that individuals can unintentionally set themselves back or unfairly get ahead, simply because their personality drives them to be more or less aggressive in salary negotiations.

In our model, all changes to salaries happen within the model, and all updates to the model affect all employees equally — if the team needs to increase salaries to attract a new team-member, that reflects a change to the system. We believe that this approach will steer us toward a more team-oriented mindset about compensation.

Operating principle: Distribute authority

We believe teams are at their best when they have maximum agency over the variables that impact their resources and performance. The balance between cashflow and expenditures on employee salaries, collective benefits, profit sharing, and reinvestment is one of the most important decisions a team can make, directly impacting the performance of the business. We want to maximize our team’s ability to control those levers as it sees fit, in service of our collective purpose. So far, this model was created collaboratively with the full participation and consent of each team member. As we refine it in the years ahead, and use it to determine individual compensation, we will continue to ask the team to decide for itself what is best. In designing the model, we wanted to make the process of self-governance as accessible as possible.

Operating principle: Default to open

This model is public. The specific compensation for the founders is public. And the compensation for additional team members at different levels is public. Internally, each employee’s compensation will be completely transparent to the rest of the team. We are embracing this level of transparency for a three reasons:

  1. A team’s ability to learn and adapt quickly depends on its access to relevant data. We want our compensation to adapt to the evolving needs of our team and the business. The team can only do that if they have all the information.
  2. Individual compensation must be a fair reflection of market value and performance within your role(s). The more data each team member has, and that the external market has, the easier it is for the organization to ensure that individual compensation meets these standards.
  3. The likelihood that implicit or explicit biases — based on gender, race, or any other difference — will create unfair differences in compensation is drastically reduced when everyone can see what each other is making. The team is empowered to hold each other accountable.

How the model works: salary

The salary calculation includes the following variables:

Relationship: Level of ongoing mutual commitment between the company and the person. Founder (member of the original founding team), Partner (senior leader who was not a member of the founding team), and Member (all other employees).

Capacity Level: Expected relative ability to contribute to the collective purpose and business performance, as collectively determined by the team and the employee. On a scale of 1–6.

Location*: City or geography where a person lives and works, as an indicator of their relative cost of living.

Role*: Unique roles and accountabilities that warrant additional compensation.

*Currently, at our small size and single office, neither Location or Role make a difference. We all live and work in NYC, so it’s the same across the team. And we have not identified any unique roles that warrant special compensation. But we are including these variables in the model to spark consideration and discussion in the future when they may become relevant.

Each individual’s compensation is calculated by taking a base salary associated with each Relationship level and multiplying it by a value associated with each capacity level, plus location and role adjustments as needed.

Annual Salary = (Relationship Base Value) x (Capacity Level Value) + (Location Value) + (Role Value)

For example:

Mike Arauz, Founding Team Member
Relationship: Founder
Capacity Level: 5
Location: NYC
Role: N/A
$110,000 (Founder base value) x 1.60 (Capacity Level 5 value) + $0 (Location NYC value) + $0 (Role value, N/A) = $176,000 annual salary

How the model works: equity

First, we’ve committed to granting 50% ownership to the founding team, and saving 50% ownership for employees. We chose this ratio to balance a fair compensation for the risk we took on as founders with a desire to be largely employee owned (and operated).

Equity is calculated using the same variables of Relationship and Capacity, and comparing that contribution to the relative risk they’ve taken by joining us either during our first few months or later after the business is more established.

Relative Equity Value = [(Relationship Base Value) x (Capacity Level Value)] ÷ [(Time Risk Value) x (Cash Risk Value)]

The Relative Equity Value quantifies the portion of equity that each person gets. That portion is then calculated as a specific number of shares.

For example:

Hypothetical new employee joining us in February
Relationship: Member
Capacity Level: 2
Time Risk: 3
Cash Risk: < $5,000
[4 (Member equity value) x 1 (Capacity Level 2 equity value)] ÷ [3(Time Risk equity value) x 4 (Cash Risk equity value)] = 0.33 (Relative Equity Value)
0.333 * 10,000 = 3,333 shares = 0.231% ownership of the company

Special thanks to the team at Buffer who has been leading the way on the transparent salary front. We used Buffer’s model as a starting point for this model. Also thanks to many members of the Responsive.org community who are really on the forefront of testing and developing these practices. We hope that by sharing our model we will help push other companies toward more open and fair compensation.

N.B.

If you have been following our cashflow and financial reporting you may notice that our salary expenses don’t match what we say we’re paying the founding team. That’s because the Founding Team has chosen to forego our full salaries until we pass a threshold of cash on hand, and ensure a bit of financial stability that we feel is necessary to grow. We do not expect new employees to share this burden if they join. And we are adjusting what we pay the Founders on a month-by-month basis dependent on projected cashflow.

Known Unknowns (to test and validate with further data)

This is only a start. The only thing we’re certain about this model is that it’s not perfect. We fully expect it to change over the months and years ahead. Everything in it is subject to the ongoing advice and consent of the entire team. Each member will have the ability to influence the model over time and help us adapt it as needed to move us toward our collective purpose.


We look forward to learning how this is broken, and working with our future colleagues to make it better.

If you’re interested in learning more about this model, or applying something similar in your own company we would love to hear from you. Email us at team@aug.co.