How to make an 'employees set their own salary' policy work

This is one of the more radical policies at Semco - Ricardo Semler's ultra-democratic Brazilian company. I think that if you can implement it right, it can help to make your organsiation a magnet for talent. The concept also gives me a feeling of mischievous excitement, which appeals too :)

We tentatively tried this out once with an employee who was hungry to progress quickly in the company, put in maximum effort and reap the rewards. It's a very hard discussion for any manager when an employee is suddenly asking for a huge raise, not least because we have open book accounting and so everyone else on the team would know what had happened.

But I thought it'd be an interesting experiment, so we allowed him to set his own salary, but made sure he understood that this would be transparent to all of his colleagues, and that it would be up to him to prove he's worth it. He increased his salary from £20,000 p.a. to £30,000 p.a. and although my first thought was "oh shit, this is going to backfire big-time" we kept our end of the bargain and let it play out.

It did cause some raised eyebrows from other team members - interestingly, more from the other relatively senior members of the team on similarly high salaries. But it was incredible to see how he instantly raised his game, worked his socks off, and although it wasn't immediate, his performance quickly caught up with his new salary.

It's my belief that in another company, a raise of that level would have never been authorised, and the employee would have left and got a job somewhere else on the higher salary, giving someone else the benefit of that talent.

It wasn't quite a happy ending though as he left the company within a year of the payrise, but I take a bit of comfort in that he left to pursue out of work interests, not to work for a competitor.

We haven't adopted a company-wide policy for employees setting their own salaries yet, but I think we may be getting close to a time when we could do this. My current thinking is that there are a few essential ingredients that you need to have in the mix to make it work:

1. Open book accounting. You need transparency so that everyone knows what everyone else earns, so everyone is accountable to their colleagues. Also, you need a complete view of the company's financial position and budgets in order to set it to something appropriate.
2. The policy should only apply to managers, and those managers should be subject to full-on 360 degree appraisals so that their reports assess their performance. Together with Pete Burden I'm currently working on some ideas about how you can create roles for managers without creating hierarchy - more on this another time.
3. Directors have to maintain a right to over-rule a salary, but in general will try to avoid using this right.

If anyone knows of any companies other than Semco who have implemented this, I'd love to know. Or if you're considering opening your books and becoming more democratic, then please get in touch - it would be cool to meet up and chat about this stuff.

Comments

[Matthew Hill]

I'm interested to note that you've modified your criteria of eligibility to such a scheme. When NM trialled it before, it was open to all. Now, it's only open to managers. Does this mean anyone wanting to raise their game has to become a manager?

Why the change?

[Tom Nixon]

Potentially it could work for all employees, but my gut feeling is that it's easier to implement for managers because you have an extra layer of accountability (managers being evaluated by their reports.)
In theory this helps to keep the salaries realistic.
At Semco, where I borrowed the idea from, they only have people at a management level setting their own salaries so they've probably reached the same conclusion.

Not sure what you mean about people having to become managers in order to raise their game. Just because you're not setting your own salary it doesn't mean you cannot progress within the company.

[Matthew Hill]

Ah, that's the clarifiction I wanted. I inferred from the 'manager criteria' that it meant other employees wouldn't get substantial pay raises unless they become a manager of some sort, which would rather fly in the face of NM trying to be different... :-)

In my experience, other companies force you into a project manager/management role if you want to earn more money. Few seem to recognise that employees who excel at their role and who are experts in their field, deserve to be paid well too.

One of the factors contributing to me quickly leaving HSBC was the slightly smarmy way my boss implied I coud make myself invaluable and get good bonuses if I 'chose' to become a manager. Not 'prove your worth at what you do' but 'become a manager' Just like that. What a load of nonsense! ;-)