Take the Boss and the Egos Out of the Salary Equation A salary formula without bias combined with peer-based merit pay
By Jurgen Appelo Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Research indicates that women are bad at negotiating for themselves, but good at negotiating for others. Sadly, it is one of the main reasons why women often earn less than men. The easiest way out of this situation, in order to achieve fair compensation for everyone, is to distinguish between participation and performance.
When I ask people about the most important factors for compensation, I usually find that performance comes out on top, closely followed by responsibilities, experience and education. Oh, and everyone wants compensation to be fair, of course. However, there are different opinions about what actually is fair. There are people who say it's fair to pay everyone equally, regardless of age, family size, and cost of living. On the other hand, a good percentage thinks it's not fair to pay high performers the same as low performers.
Related: How to Set Salaries
These are my four elements of what is fair:
1. Don't pay for negotiating. It is fair to neutralize negotiation skills when determining a person's compensation. When salaries are established through negotiation, people with great social skills or technical skills may find themselves underpaid, because the ones who come out on top are more likely those skilled in politics.
2. No bias, even subconscious. It is fair to prevent human bias involving race, gender, disabilities, background, appearance and more. It is well known that many forms of bias are subconsciously involved when a manager evaluates an employee's capabilities. Sadly, actual performance may follow imagined performance.
3. Don't pay for high self esteem. It is fair to disregard self-assessment of employees. After all, 80 percent of people think they perform above average. We are great observers of the performance of others, but we are terrible at evaluating our own. Most of us think too highly of ourselves, so let's ignore the egos.
4. What does the team think? It is fair to ignore performance estimates in favor of actual performance as measured by peers. In many organizations, people are paid for how they are expected to perform, not for how they really perform. Any assessments done by peers will always outperform any illusions created by managers.
Related: Salary Envy
Sounds difficult? You might be surprised! It's actually easy when you separate participation from performance.
Salary Formula. The first thing to do in a fair compensation plan is to pay employees for participating in the organization. People learn practices, run experiments, have conversations and offer services. A significant part of that work is unmeasurable in terms of outcomes.
Even more, you shouldn't only pay for people's performance, because pay-for-performance schemes push employees to play it safe. They will only use established practices (high payoff, low learning), and they will rarely run experiments (high learning, uncertain payoffs).
A fair salary formula is 100% transparent for everyone and may include job title, seniority, work experience, education, cost of living, and several other variables. The formula is optimized to pay everyone with a somewhat conservative base salary and shows what everybody gets for being part of the organization. Performance is not part of i, and neither is gender.
Merit Money. The second thing to do is pay employees for actual performance in the organization at any time the financial position of the company allows it. After all, performance depends on the employees and on the environment. When the environment has been favorable to the business, you should pay bonuses to those who have contributed to the shared success. You can do that by delegating this job to everyone, in the form of a merit money system.
All employees get a certain amount of credits, and they are expected to give them away to their peers in any way they like, depending on how they believe their peers contributed to the organization's purpose. The only rule is, they cannot credit themselves. The credits that employees earn from their colleagues can then be converted to cash.
Such a merit money system guarantees that great deeds and great collaboration are rewarded, no matter how unexpected and unmeasurable they are, because human beings see much more than any spreadsheet-driven performance measurement framework. You achieve fairness by separating compensation into participation (with a salary formula) and performance (using a merit money system).
With this solution, you can get rid of negotiations, keep the salary formula free from human bias, avoid unreliable self-evaluations and are no longer expected to estimate anyone's performance upfront. What remains are fair variables in a transparent formula for a base salary, and a fair assessment of peer performance to be used for regular extra payouts.
Last but not least, in an environment that favors transparency and collaboration, those who are good at negotiating for others will do just fine.
