Cutshort
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Cutshort

We don’t negotiate salaries anymore (and it feels liberating!)

[Update in March 2022: In last 9 months after adopting this policy, we have rolled out 20 offers. We made our maximum offers irrespective of the current salaries of the candidates and made this clear to them.

Result — Zero candidates tried to negotiate. 15 offers were accepted and 13 candidates joined. We perhaps paid 20% more salaries but earned the confidence of the candidates that we will do right by them even after they have joined. Worth it, we think! ]

At Cutshort, as we have grown the company in last 6 years, we have internally been very open about one thing — are we rewarding the efforts of our team members fairly? In other terms answering this question:

Whether’s it’s the cash, stocks or career growth or other things — is everyone getting a fair deal?

We have discussed these questions and even disclosing our salary numbers during lunch hours, evening snacks of company outings openly. New employees, potential candidates or interns- all have been surprised about such discussions that other companies only conduct in closely guarded meeting rooms.

OFT — the fundamentals of our new compensation model

When we were <15 people, things were simple. Just try to estimate the value someone brings, see what they are expecting and do as best as we can. This was of course subjective and caused issues when someone had a high current salary or had high salary expectations based on their self-evaluation or financial constraints such as home loans, education loans, etc.

The end result — we often would offer new folks a higher salary than the current team members. Although we often used to share this fact with the existing team members and thankfully they were okay with it for the company’s benefit — but it definitely didn’t feel good.

As we expect to grow to 40 employees in next 6 months or so, it’s clear that we can’t have this variability in this process. We realized that our compensation needs to be OFT — Objective, Fair & Transparent. This is what it means:

  • Objective: Instead of looking at the external factors like a candidate’s current salary or the competition salary — what is the best salary we need to pay to get the best person for a given job? Based on our unique context of how we hire and advance people to the next tiers, we can find a good enough estimate of this using variables that are as objective as possible. Our inspiration was the salary calculator shared by Buffer a few years ago.
  • Fair: Are we paying the team members in line with the value of their work? Or are we paying less in situations when the market pays less for some roles such as sales and recruitment or when someone doesn’t ask for salary revision? We decided that to be fair, we will proactively revise their compensation when there is a change in estimation of their value. This could also happen when the team salary benchmarks change or when the company hits the financial milestones and can afford to pay more.
  • Transparent: This is most important. If we can’t share the process of how the compensation is calculated, it gives the team members no way to provide feedback and know how they can increase the value of the work to increase their compensation. So, for example, we have shared with everyone these variables that we use in our compensation model v 1.0
Components of our current salary model

And so here is it — we are saying no to salary negotiations, for both new and existing employees

With our compensation becoming OFT, we feel confident about discussing our compensation model with both new and existing employees openly and have taken on big decision — no salary negotiations anymore. Here is how it works:

  1. Based on our compensation model, we estimate the value of the job for every team and every job position using the variables mentioned above. This gives us a good enough figure that is competitive in the market and also which fits the way we found our awesome current team members.
  2. Then we try to add some extra buffer from our side - the extra amount we would have paid if the candidate/team member was a good negotiator. In effect, everyone gets the same benefit that a good negotiator would have got, right off the bat. This benefits everyone, especially the people who hesitate to negotiate in general such as women (reference: UC Davis study, monster study)laid off employees, freshers and so on.
  3. We do understand that while our compensation model is as objective as possible, a candidate or the employee’s own valuation may differ a bit here or there. For this reason, we also add a good number of ESOPs upfront to compensate for this difference in cash salary and to instead add a reward of much larger amount. This ESOP starts in proportion to the salary and is often topped up for the team members who act more and more like “owners” and not “employees”.

A side note on ESOPs

Many people advise the employees/candidates to treat ESOPs as zero value and just try to get more cash salary instead. This advice applies to these companies:

  1. Early stage companies that carry a lot of risk. If one has Rupees 10 Lakhs worth of shares in a company that has only 1% chance of success, the expected value is only Rupees 10,000. Getting an upfront salary hike of 1 Lakh is way better in that case.
  2. Heavily funded companies with some business success but lofty valuations. At such high valuations, the value of even small ESOPs shares might look lucrative, but the exit options become quite limited. Either the company needs to get acquired, or go IPO or do a buy buyback to give the employees real money. Fortunately, the recent buy backs by companies like Razorpay, Swiggy etc are steps in right direction:

However, at Cutshort both these conditions don’t apply.

  1. We are not idea stage company — we are a profitable company with ~$1M annual revenue rate. We are in a large ~$10B market and growing 3x-5x every year not because of advertising but because of our network effects that are only becoming stronger. So, our share value is less risky and is grounded in reality — making it very close to cash.
  2. We have accepted only a small investment and that too to execute a buy back the ESOPs of an early employee. So, we clearly are not doing ESOPs just to show a carrot — but to actually provide a meaningful sum to our team members in line with their contributions.

The benefits since we adopted this new compensation policy

Trust and fairness are the fundamentals of building a company. Sure, a non-transparent, unfair compensation model can help a company pay less to unsuspecting employees & hire more premium talent at 2x-3x the common salaries, but that’s not a foundation of a great team.

Our belief is that people don’t always want maximum salary. They want a fair and transparent system that rewards them in line with their efforts.

The net effect of all this is that our salary offers and revisions are now not only competitive but also OFT which is what every team member values. With the ESOPs that actually have meaningful value our compensations are one of the most rewarding out there.

It’s been a month and we have already:

  1. Offered someone 3x of their current salary since their current company had fundamentally undervalued them. Our compensation model gave this number based on our current team benchmarks of that role and we made our best offer right off the bat.
  2. The same person tried to negotiate further. Paying any more would be unfair to our existing team members, so we politely declined.
  3. Offered someone 50% less salary than their current salary. This person wants to transition from a tech role to a business role and this is what compensation model calculated. We shared the reasoning and our OFT principles and she could understand how such a model could reward her immensely. With our ESOPs being added to the mix, this person found our offer to be genuine and accepted the offer. We are looking forward to working with her soon!
  4. Revised salaries of our existing team members not based on % hikes but based on the impact of their work + benchmark change in their team. None of them asked for a hike — we did this proactively.

These are things that very few companies do outside. Most companies continue to underpay when they can. Only when a candidate or employee gets a counter offer — they open their purse strings.

Doing things the other way — the right way — is liberating. The trust this openness creates is energising. And when you’re on an ambitious mission, this what matters.

Will keep updating this post with more updates as we roll forward with this more!

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Cutshort is the network of 2 million professionals that helps you grow: https://cutshort.io/hiring

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Nikunj Verma

Nikunj Verma

Cofounder at Cutshort (www.cutshort.io)

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