When you start a new business and have just one or two workers, it is both easy and practical to make salary decisions on a case-by-case basis. As your business grows, however, this approach likely will cause workers 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 workers 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 is right? Should your company’s salary information be transparent? In my experience, many entrepreneurs debating transparency do not 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:
- Workers perceive salary decisions as arbitrary and presume they are unfair.
- Workers view their performance differently than you do.
- Workers are confused about how the performance and compensation system works.
Here are three ways to address these issues:
- 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 a worker’s skills, experience level and performance.
For example, say the salary range for a customer service agent is $20,000 to $30,000. A worker with average skills, experience and performance would earn $25,000. You can then rate the worker on a scale of -10 to +10. For example, if the worker 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, workers 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, workers will focus on improving their skills to earn more. It is a subtle, but important distinction.
- Regularly tell workers where they stand.
Every job in the company should have a written set of objective performance expectations. Workers should know how their performance compares to those standards. In addition to an annual formal review, it is 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 would not keep up with their chores. While workers do not need the hourly feedback my kids seem to need, a single annual review just is not enough.
When you provide frequent performance feedback say monthly — workers have no reason to be resentful about salaries because you give them ample time and guidance to improve. Conversely, when you tell a worker on December 31 that he or she has been doing a bad job since February 1 and, as a result, will not be getting a raise, expect him or her to be rightfully resentful.
- Educate workers on your performance and compensation system.
Once you have adopted a systematic performance and compensation system, communicate it to all workers, department by department — even if they do not (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 workers.)
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 worker 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 have followed these three steps, you will 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 will have effectively eliminated the underlying issues.