How to negotiate compensation with your Team (Clue: Don’t…)

I’ve had some interesting discussions recently on the topic of negotiating pay. for new or existing team members. I thought I would jot down some notes here.

Let’s start with a disclaimer, I think that pretty much everyone is in favor of fair pay. I certainly don’t intend to imply that anyone who disagrees with what I am writing here is being unfair. My preference is to use the following methodology to achieve fair pay and avoid some of the problems which can occur around compensation.

Before describing the methodology, I’ll introduce you to a game.

Welcome to Mao

Work shouldn’t be like playing Mao. Life has enough unpredictable twists and turns, your workplace should not be one of them. Our time at work is much easier when the rules are laid out in advance and everyone understands how they work. This applies to compensation too.

A simple 4 step framework for transparent compensation

  1. Research
  2. Structure
  3. Communicate
  4. Iterate

1) Research and benchmark

The method that most companies use to do this is actually pretty good i.e. get some industry data and then decide where you want to position yourself for the various aspects of pay (salary, bonus, benefits, car etc) relative to industry standards.

There are a number of possible approaches to this, some examples are:

  1. Pay top of market cash compensation for the best people (see the famous Netflix Culture page for an example) with a mix of cash and equity / options (many companies let you chose how to allocate between the two).
  2. Offer mid to low cash offers and large equity compensation, this is common for startups who are very cash constrained but still would like to hire the best talent to help them a challenging and rewarding mission. For this to work new hires must believe in the company so that they value the options and the potential upside they can deliver if the company is successful.
  3. Offer low compensation combined with excellent other work conditions. These include flexibility, a mission to improve society or other benefits.

All of these can work but need to be carefully researched, documented and placed within the context of how the business generally does business.

2) Structure

Once you have done your research, build a structured set of compensation principles which includes general principles and role specific principles.

General Principles: Build out a summary you can share outlining how you think about compensation and what rules you have set. Examples include:

  • What benchmark data you are using
  • How the organization is being positioned relative to the benchmarks
  • How we think about the different aspects of compensation i.e. salary, bonuses, equity and other benefits.

Role specific principles: Lay out the details of the different roles in your business. For each outline:

  • Role
  • Required skills / capabilities
  • Responsibilities
  • OKRs (or other goals and metrics framework) mapped to company OKRs and Mission (see here for more on this)
  • Compensation

Building this in an organized way ensures everyone can understand what the role is, how it contributes to the success of the organization, what they need to achieve in the role and what the role pays. It also provides a map for everyone letting them know what they need to do in order to gain a higher paying role or different role with more/different responsibility.

3) Communicate

Communicate this framework. No need to keep it a secret if everyone is paid based on the same compensation framework.

It’s actually quite simple to communicate once it is written up.

If (or when) the framework is challenged, it is an opportunity to understand what is bothering the team member. You can then either articulate why it is structured like it is, adjust the framework if there are problems with it and adjust the way it is communicated to prevent future misunderstandings.

4) Iterate

What happens if you discover new information which suggests your research is no longer accurate and therefore the basis for your structure is incorrect? An example might be that outside candidates reject the job because your pay structure is below the level you are positioning yourself in the market.

We can think of this as a pact we make with our employees when we ask them to join our Team. Here are two different versions of this pact:

Version A: “We have a job to be done and if you join my company to do that job I will to convince you to join for whatever is the least amount you will agree to be paid. You can feel free to try to get the maximum from me. Let’s see who does better and then lets start working. Expect to negotiate for future pay raises as well.”

Version B: “We have a challenging but fun job for you to do which pays $X. We won’t pay more for that job if you ask and we won’t pay less if you don’t know to ask for X. We will pay X. If it turns out X is too low e.g. market salaries change to $Y, we will pay you $Y to bring you in line with the market.”

There is nothing better than inviting a team member to a meeting to let them know that we are increasing their compensation since we have found out that our old framework under-pays them for their role. This is a great meeting, culture reinforcing and results in team members feeling they are being looked after. They can feel free to focus on doing really well in their role, safe in the knowledge that their compensation will always be fair.

No more Mao

Using a framework like this can change compensation discussions from a game of Mao to simple structured and effective communication.

Conversely when we fail to do this, we can assume that this issue won’t be forgotten, even if it is not often mentioned. I have seen numerous examples of compensation issues resurfacing in frequent and unexpected situations as team members try to figure out the rules of making their pay ‘fair’. It also regularly is cited in exit interviews, long after the manager thought it was a settled issue or hoped the employee had forgotten about it. Ultimately it might even be why someone leaves a job they otherwise love.

BUT don’t negotiate!!

Negotiating compensation can result in situations which are not fair and in my experience can cause a number of culture destroying problems in your business:

a) Some people get paid more based on how well they negotiate and not based on the job they perform and how well they do it. How many team members would think that was fair once they know about it?

b) Compensation becomes an issue. Everyone either a) engages in conflict in order to try and get better compensation or b) doesn’t and knows their compensation is not as good as it would be. Conflict is pretty low on the list of reasons why people enjoy coming to work.

c) Even those who negotiate higher comp don’t know if they have the best deal possible. They only know what they achieved, not what they could have achieved. So bizarrely those who are the highest paid in your organization may not be happy with their compensation either.

d) Since most people work to get paid, compensation concerns are not something which you can expect them to forget about. As a result, if people are unhappy with their compensation it ends up taking up a lot of everyone’s time to deal with this. We should have better uses for that time.

Why would anyone want this grab bag of nasty issues in their company….

Almost everyone will prefer the structured approach

  • No need to fight to keep salaries confidential — they are all aligned.
  • No need to negotiate with candidates — there is nothing to negotiate.
  • No unfair situations — everyone is fairly aligned.
  • Career progression is earned and built in , getting paid more = taking on a role with more responsibility and / or with higher results expectations.

When I have implemented this type of framework as a manager it dramatically reduced the amount of time my management and HR needed to spend discussing compensation. I also took a lot of stress out of some situations which would otherwise have been very difficult. This includes the time when a list containing a number of team members’ salaries was left in a public space and someone read it. There was no drama as there were no nasty surprises.

Some expectation setting

  • What level do we pay relative to benchmarks?
  • How many levels for each role?
  • What does it take to move between them i.e. what qualifies someone for a higher paying role
  • What role should we be hiring someone for? What if we want them for a junior role and they want a more senior role?
  • Do we pay more for people with more experience even if experience does not equal more or better results?
  • How do we give our more experienced people more responsibilities so we can justify paying more?
  • How do we get away from career ladders and move more towards the Jungle Gym structure so we have more ways to offer career progression than seniority and compensation?
  • What other benefits do we give?

If we take the time to think through these issues, our compensation framework can get more nuanced and customized to our business. As a result it becomes easier to implement and becomes a valuable part of the infrastructure of our business.

Wishing you many happy years of not negotiating compensation.

Appendix — 3 ways you can end up with unfair compensation without meaning to

a) The too involved senior exec

b) The ‘low-ball’ offer

c) Not adjusting pay for loyal tenured team members

Let’s review these in order.

a) The too involved senior exec

I have seen a number of instances where in the absence of a well structured compensation framework a Senior Exec will use their gut to decide what compensation to offer to a candidate. The hiring manager may then unsuccessfully express their dissatisfaction with this based on e.g. it being less than industry benchmarks or what the candidate currently has / is expecting. The Senior Exec will often then try to step in and try to convince the candidate to take the offer.

In my experience what frequently happens is that because the candidate has a lot at stake they do significant homework. They then present the Senior Exec with well researched information that supports a higher compensation plan than they have been offered. The less well armed Senior Exec wants to hire the person, is often under pressure to do so and ends up negotiating a higher package than they thought they would have to. However, none of this happens within a framework and this leaves everyone feeling bad about the outcome (and the process of getting there i.e. conflict). You can expect this kind of compensation discussion to be brought by one or both of the parties in future discussions about performance and / or compensation.

b) The Low Ball offer

The low-ball offer which is negotiated

Theory: If I provide a low-ball offer and the candidate negotiates me to a higher number then they’ll feel like they won. In addition maybe they will accept a lower number than I am willing to pay or lower that they thought they should have got.

Suggestion: This might work in the short run. Let’s say you offer someone a salary of $50,000 but know you would go up to $60,000 to clinch the deal. Let’s say you are able to close it at $58,000, you might assume that they accepted it and therefore should be able to put compensation to the side and focus on their work. However, in my experience that is not what happens.

Why? Because the new employee knows the number you first offered was too low. Therefore they know you are trying to pay them as little as you can for what they can bring to the company. That is a pretty bad foundation for such an important part of why they come to work every day.

Now that the new employee you have just hired knows that fairness is not one of the things they can always expect from the relationship they will probably be wondering any of a number of things such as:

  • How do I know the final number I got is fair? Should I have insisted on more?
  • What about my other work conditions, are they negotiable too? Are they fair?
  • When and how should I be aiming to adjust my compensation up next?

That’s a lot of things you probably don’t want your brand new team members thinking about.

But don’t people want to feel like they negotiated a better deal than they were offered?

Well it’s true some people do, especially if they have experience with other companies who pay more for those who negotiate harder. This is why you need to invest time adjusting them to the concept of having a fair compensation framework. Invest some efforts into explaining the structure and why this is what you pay for this role. In the long run if they don’t respect this kind of structure, especially if it is well thought out and fair, then they are probably the wrong people for your organization. This would be a great thing to find out up front.

Now let’s now look at an even worse scenario than a low-ball offer which is negotiated higher. What about an employee who didn’t negotiate a low-ball offer…..

The low-ball offer which is accepted

Some people don’t like to negotiate. They assume that they are being given a fair compensation offer, especially if it matches some level of industry expectations for their level of experience and the responsibilities they are taking on. It might even be a really good offer at for example 70% range for this position. On accepting such a compensation package they will likely be happy and expect to not to have to think about compensation. They are ready to just get on with the job.

However, since the low-ball offer is intended to be negotiated higher, other team members may have started with the same offer but ended up getting paid more in the end. What if an employee who accepted a low-ball offer then finds out (and they often do, compensation is frequently shared between employees and we should expect this to be the case,) that another person with similar skills and responsibility (or worse, less of one or both,) is actually being paid more because they negotiated more. The result is that even when we pay everyone really well, if we pay some people even better in what seems to be an arbitrary way, then those that don’t negotiate will feel bad about their pay.

That’s pretty bad….. but it actually gets worse…..

c) Paying our most loyal and tenured team members less…

The devil you know: Another major problem with fair pay for existing Team Members is that we get to know the strengths AND the weaknesses of our Team Members. As a result it is easy to fixate on the things we want them to do better when thinking about their compensation and to come up with justifications as to why they don’t deserve industry benchmarked pay until they do X or fix Y. New team members get the benefit of everyone focusing on an idealized view of what the person can contribute to the organization, unencumbered by the reality of their weaknesses.

Under pressure: Finally this is compounded by the fact that companies are often under pressure to hire new employees. As a result the candidates are often in a very good negotiating position. If we negotiate pay then they will likely get paid more than team members who joined in less pressured times.

The resulting compensation discrepancies can be very upsetting, demotivating and culture damaging.

You may not lose people immediately. But possibly only because of inertia, moving jobs is hard and people often like other things at work e.g. the people, the mission, the work etc. However, you will lose the trust of your most loyal people since you are not looking after their interests in the area of compensation. Over time they may well lose motivation and / or move.

COO of MultiChain, former COO of SimilarWeb & Seeking Alpha. I also advise a number of B2B & B2C SAAS companies on operational issues. Sharing thoughts here.