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4 Reasons You Should Let Your Team Set its Salaries Putting the power in the hands of employees could lead to a happier and more productive environment.

By Peter Baumgartner Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.


If you've ever worked as part of a management team, you've probably experienced some level of dissatisfaction with your salary at one time or another. Maybe you felt your efforts were undervalued, or you learned that another (less deserving) team member earned more. Over time, these feelings of underappreciation and resentment can lead to dysfunction within your team.

A number of companies have found an innovative solution: letting team members choose their own salaries based on the financial health of the business and pay at similar companies. While it may seem counterintuitive, companies that have team members determine their own value in a transparent setting have reported outstanding results.

Self-determined salaries are considered a rather new approach to worker compensation, but business owners have found success using this concept since the 1980s. Semco, a Brazilian company that brings in more than $210 million annually, instituted the practice when new owner Ricardo Semler implemented several wide-sweeping operational and administrative changes.

Related: 3 Ways to Determine Your Own Salary

Semler let his employees choose their own compensation and even went so far as to allow his workers to hire and fire their own managers. The company thrived, and Semler went on to write a number of books that continue to influence innovative companies' management styles.

Another company offering its employees a choice is Figure 53. Over time, the salaries of all its team members settled to a flat rate across the board. Recently, founder Chris Ashworth asked the team to give themselves a raise by voting on what the new salary should be.

So what keeps team members from shooting for the moon and asking for ridiculous sums? And why does it make them work better?

Related: Salary Review Season Is Coming. Who's Getting a Raise?

Self-determination: Studies show that personal autonomy is the number-one contributing factor to happiness -- even more important to a person's sense of well-being than money. Given the opportunity, workers find more value in choosing their own salary than in the amount itself. The autonomy becomes part of the compensation.

Transparency: When a company operates with a closed payroll, through which management determines arbitrary salaries, team members often make assumptions about each other's earnings and can end up feeling undervalued. Whether these feelings are justified, over time, they lead to muddled work relationships, a poorly functioning team and people leaving the company to seek higher pay.

Level earnings: Companies that use self-selected salaries report that people who choose to earn on the higher end of the spectrum will forego raises and even decrease their own salaries voluntarily in times of low profit, while lower earners are often encouraged by team members to raise their salaries when they've achieved successes. This provides a strong sense of cohesion, the feeling that everyone is in it together and that what benefits the individual benefits the whole.

Talent attraction: If a company wants to stand out from the crowd and attract the highest quality talent possible, offering the opportunity for a high level of autonomy is a great way to get attention from the best candidates.

The more your employees feel like vital members of the team (and not just replaceable cogs), the more they will strive to enhance the overall success of the business. Employees who work for an arbitrary salary are likely to do only what they need to do to earn that salary. But if they know they will have the opportunity to make more money in proportion to the company's earnings, they're likely to push themselves harder for the good of the team.

Related: Companies to Disclose CEO Pay Vs. Employee Pay

Peter Baumgartner is the founder of full-service web studio Lincoln Loop, makers of Ginger, an online platform to help distributed teams communicate. Peter is an expert in Django-based Web development and a thought leader in entrepreneurship and remote teamwork. He welcomes anyone to reach out to him on Twitter or Google+.

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