Pay People a Fair Salary Using a Transparent Salary Formula

How much are you getting paid?

Is it as much as you would get next door?

Would you get more if you quit your job and moved somewhere else?

Pay Survey Analysis is the process of gathering data from other employers in a labor market to see how much competitors pay their employees. Human resource experts consider this step essential to keep an organization’s salaries “competitive” within its industry. [Burke, “Designing a Pay Structure”]

I disagree.

There are three things fundamentally wrong with the assumption that a company should match salaries paid by its competitors. The first problem is that of treating people like replaceable cogs in a machine. A video artist in one animation studio is not simply comparable to (or replaceable with) a video artist from the studio next door.

The second problem is the fear that people will apply for a job at another company for a mere 10% salary increase. When this fear is justified at your organization, you apparently have a bigger problem than just an uncompetitive compensation plan. Maybe something more important is missing. An inspiring purpose, maybe?

The third problem is the idea that one can calculate the average salary for any kind of job. In the creative economy, the pay scales of creative people often do not conform to a standard bell curve with a nice big blob in the middle and a tail on either side. As a public speaker, I find it very interesting to know how much other speakers earn, so I know where I stand with my own pricing. But I won’t price my services at the “competitive” midpoint between Bill Clinton and my aunt Betty.

Salary Formulas

Several years ago, I created a salary formula to pursue fair compensation for software developers and project managers. At that time, I had to work backwards from people’s actual salaries to find a reasonable set of variables, constants, and multipliers that would forecast salaries for new employees. Unsurprisingly, I did this all in an environment that called for confidentiality and secrecy.

Nowadays, I’m glad to see that fair calculation of salaries is heralded as the next big thing for management and human resources. Of course, it now works the other way around. Instead of negotiating individual salaries and then working backwards to check if they made any sense, it seems like a good idea to start with a set of variables, constants, and multipliers, and to calculate forward and settle on salaries that everyone can agree on.

Salary Variables

There are a few variables that could play a role in a formula. Obviously, there are the job titles or categories (C), for instance ‘network administration’ or ‘marketing’. Then there are extra responsibilities, or job tags (T), like ‘management team’ or ‘team leader’. And lastly, there are job levels (L), for instance a scale from ‘trainee’ to ‘senior’. The categories and tags represent what some people would call strategic role or job type. [Gascoigne, “Open Salaries at Buffer”; Spolsky, “Fog Creek Compensation”] And the job level is sometimes referred to as maturity, seniority, or competence. [Deshpande, “Here’s a Powerful Tool for Startups”; Elmer, “After Disclosing Employee Salaries”] The semantics don’t matter much. You can use the term that suits you best, as long as you don’t go overboard with hundreds of categories and tags. Only distinguish categories and tags that are necessary to differentiate compensation levels of (large) groups of workers.

A second set of variables can be identified when you take into account an employee’s age (A), the period of time you have employed her (P), the years of work experience she had before you hired her (W), and the years of relevant education (E). These variables are all optional. Whether or not you want to use them depends on the kind of organization you have and the culture you want to support with your salary formula. A startup business might value education and young creative minds, while a mature organization might put more emphasis on the wisdom that is implied with a higher age or longer employment. It’s your business, so it’s your call.

But wait! We’re not there yet. Keep in mind that salaries fluctuate, depending on the geographical areas where people live. Employees working in Sweden require higher pay than those in Spain, for the obvious reason that life in Northern Europe is more expensive (and less exciting) than in Southern Europe. But even within one country, you might want to keep an eye on the differences in cost of living between regions. [Spolsky, “Fog Creek Compensation”] This could give you an extra variable representing location or geographic area (G).

Finally, you can make adjustments to take into account whether employees prefer to have part of their monthly income replaced with stock options (O) [Gascoigne, “Open Salaries at Buffer”]; whether they participate in a bonus or merit money system (M); and whether you wish to give special consideration to superstars, such as Nobel-prize winners or writers of management books (N). You could even consider a public metric, such as a Klout score (K), which indicates how well connected a person is on social networks. After all, when we value creative networkers for their creative skills, education, and work experience, why not compensate them for their social skills and networking abilities?

A Useful Formula

With a good set of variables, you should now be able to play with a spreadsheet and create your own formula. Money is such a sensitive topic for many people that I’ve decided not to give you any serious examples in this text. From experience, I know what will happen: people will start analyzing, discussing, and criticizing the examples, instead of thinking deeply about their own context and performing their own calculations. So let’s not go there.

One thing I want to emphasize is that there’s no one best salary formula. You must make sure to experiment with calculations and keep the formula easily adaptable, with small iterations. [Heaps, “Ten Steps for Building a Salary Structure”] Expect that some people will try to game the system. Their behaviors are complex, while your formula can only be complicated. No spreadsheet can withstand human ingenuity when it comes to influencing results. Therefore, focus on a culture of trust and allow the formula to evolve together with people’s behaviors. You should also have a clear policy that addresses people’s current salaries whenever the formula changes. At the same time, before introducing any new salary formula, don’t forget to make financial projections and compare them with your internal budget constraints. [Heaps, “Ten Steps for Building a Salary Structure”]

A salary formula, which everyone understands and gets to learn about before accepting a job, is a great step toward a compensation plan that pays people fairly for the value they create in the organization.

Jurgen Appelo is Europe’s most popular leadership author, listed on Inc.com’s Top 50 Management Experts and 100 Great Leadership Speakers.


Resources

Burke, Lisa. “Designing a Pay Structure” <http://bit.ly/MmL8sP> Society for Human Resource Management, 2008. Web.

Deshpande, Saurabh. “Here’s a Powerful Tool for Startups to Define Job Levels and Determine Salary Slabs” <http://bit.ly/1lpH7Ui> Your Story, 25 March 2013. Web.

Elmer, Vickie. “After Disclosing Employee Salaries, Buffer Was Inundated With Resumes” <http://bit.ly/1edJPIG> Quartz, 24 January 2014. Web.

Gascoigne, Joel. “Introducing Open Salaries at Buffer: Our Transparent Formula and All Individual Salaries” <http://bit.ly/1igXaPH> Buffer Open, 19 December 2013. Web.

Heaps, Warren. “Ten Steps for Building a Salary Structure” <http://bit.ly/MmMQdI> International HR Forum, 29 July 2010. Web.

Spolsky, Joel. “Fog Creek Compensation” <http://bit.ly/1bd2b6J> Joel on Software, 30 August 2000. Web.