I was recently speaking with one of our entrepreneurs. One of the strongest performers on his team requested a salary raise and he wants to keep the employee. He shared that he plans to accept the employee’s request, but wanted to run it by me before doing so.
At the surface, it seems like a simple problem with a simple solution. The problem is that there’s a mismatch between the employee’s performance and their salary, so the solution should be to correct this mismatch by raising their salary.
If we think of the employee in isolation, this is the correct solution. However, I don’t think that this is the correct way of looking at the problem. The employee doesn’t exist in isolation, but as part of a system. There are tens of other employees in the company, each with a specific performance level and salary.
If the founder accepts the employee’s request, there’s a strong chance that other employees will find out. Although companies encourage their employees to keep compensation information private, this rarely works. People want to know what others are earning in order to benchmark their own compensation, and the only way to do this is to share your own compensation. So most people in a company find out what most other people in the company are earning.
Looking at the problem this way, it’s clear that accepting the raise request of one employee is likely to encourage other employees who find out about this to also request raises. As a result, you should only grant a raise to an employee if you want to encourage raise requesting behavior among other employees, and if you’re ready to give a raise to all of the employees that deserve one.
Thinking about the problem this way is an example of performing systems thinking. Systems thinking evaluates actions in terms of the impact which they have not only in isolation, but also on other parts of the system. And performing systems thinking may direct you to choose a different solution to a problem than that which you had originally considered.
For example, in this case, you may not want to accept the employee’s raise request on a one-off basis. Instead, you may want to announce a company-wide policy whereby you evaluate the performance and corresponding salary of each employee on an annual basis without accepting raise requests outside of the established cycle.
Originally published at Thoughts of a VC.