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The Salary Dilemma: Should You Be Open About Employee Pay?

The Salary Dilemma: Should You Be Open About Employee Pay?

When you start a new business and have just one or two employees, it's both easy and practical to make salary decisions on a case-by-case basis. As your business grows, however, this approach likely will cause employees to speculate, often inaccurately, and gossip about who earns how much. This dynamic can distract them from doing their jobs.

In an effort to avoid such fallout, some entrepreneurs make all their employees' salary information available to everyone in the company. At the other end of the spectrum are those business owners who think this approach is completely crazy.

So who's right? Should your company's salary information be transparent? In my experience, many entrepreneurs debating transparency don't see the underlying issues.

When you look at employee complaints about salary, they usually stem from at least one of the following three core issues:

  • Employees perceive salary decisions as arbitrary and presume they're unfair.
  • Employees view their performance differently than you do.
  • Employees are confused about how the performance and compensation system works.

Here are three ways to address these issues:

1. Develop a salary formula.
Stop making case-by-case salary decisions. Instead, define every job in the company and develop a salary formula for each one. To eliminate any perception of arbitrariness, the formula should take into account factors like an employee's skills, experience level and performance.

Related: What Employee Stock Ownership Plans Mean For Entrepreneurs

For example, say the salary range for a customer service agent is $20,000 to $30,000. An employee with average skills, experience and performance would earn $25,000. You can then rate the employee on a scale of -10 to +10. For example, if the employee had no experience, they would receive a -10 for experience. The combination of these ratings would then determine where in the salary range the employee falls.

With this formula, employees will stop asking "Why does Mary earn more than me?" and start asking "What do I need to do to become a senior customer service agent like Mary?" Instead of complaining about seemingly arbitrary salary decisions, employees will focus on improving their skills to earn more. It's a subtle, but important distinction.

2. Regularly tell employees where they stand.
Every job in the company should have a written set of objective performance expectations. Employees should know how their performance compares to those standards. In addition to an annual formal review, it’s critical to provide frequent informal feedback.

Let me illustrate this point with a personal example on a smaller scale. I have three daughters under the age of nine and they all have "jobs" (household chores) around the house. If I gave them feedback on their "job performance" only once a year, they certainly wouldn't keep up with their chores. While employees don't need the hourly feedback my kids seem to need, a single annual review just isn't enough.

When you provide frequent performance feedback -- say, monthly -- employees have no reason to be resentful about salaries because you give them ample time and guidance to improve. Conversely, when you tell an employee on December 31 that he or she has been doing a bad job since February 1 and, as a result, won't be getting a raise, expect him or her to be rightfully resentful.

Related: 5 Ways to Recruit Rock-Star Employees on a Budget

3. Educate employees on your performance and compensation system.
Once you've adopted a systematic performance and compensation system, communicate it to all employees, department by department -- even if employees don’t (or are afraid to) ask about it. In a department-wide meeting, explain the hierarchy of job titles, the skills needed to qualify for each level and the performance criteria for each job level. (Also be sure to include the same information in materials for new employees.)

For example, you might announce that the customer service department now has only two job titles -- Customer Service Agent, and Senior Customer Service Agent. To qualify for the latter, one must have mastered computers systems X, Y and Z; be certified on product lines A & B; and have a quality rating of 9+ for the last two years.

Before the new system goes into effect, give each employee a "sneak preview" performance and compensation review, based on the new guidelines. This gives everyone a chance to get used to the new system and to identify any conflicts without salary changes at stake.

Once you've followed these three steps, you'll have an objective, systematic and well-communicated approach to inform your company's performance and salary decisions. At that point, whether or not you make salaries transparent will be a moot point because you'll have effectively eliminated the underlying issues.

Related: 3 Things on a Growing Company's Checklist

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Victor Cheng is a former McKinsey consultant, author and co-founder of Entrepreneur-to-CEO Mastermind, a Seattle-based firm that advises entrepreneurs of fast-growing companies.

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