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Should startup employees set their own salaries?

A small number of startups are allowing employees to pick their pay. But is it an awful idea?

By Miriam Partington in Berlin

The Ragnarson team

Salary decisions are usually made behind closed doors — and only senior managers are privy to the details of who gets paid what.  But a small number of European startups are toying with the radical idea that employees should decide their own pay. 

Maciej Gałkiewicz, CEO and partner of Ragnarson, introduced the policy to his company in 2017, when the team was 20 people. The company is a software development agency which also has a fund to invest in early stage impact startups.

“We don’t like the idea that there is a boss at the top and they make all the decisions and the employees are supposed to just do what they say,” explains Gałkiewicz. “So in order to give people more authority and a sense of purpose in what they do, we needed to open up all the data and let them make their own decisions.” 

The concept of self-set salaries isn’t entirely new. Brazilian manufacturer Semco — which has had the policy in place since the 1980s — and US tomato processing firm Morning Star are the best-known examples. Startups such as Dutch startup Incentro made the switch to self-set salaries five years ago, as did the London-based betting exchange Smarkets.

So, how does it work? And is it the nightmare that some founders anticipate?

How do employee-set salaries work?

Before introducing self-set salaries, Ragnarson had already “opened up” its budget to employees in 2014 to show them how the company was performing financially and educate them on its revenue, costs and profit. Everyone knew what the other was earning, and the company spent time looking at the team’s salaries and ironing out any discrepancies.  

The company later transitioned to self-set salaries in 2017, with the aim of delegating more responsibility to employees. At first, staff were confused, if not alarmed. “Their reaction was like, what does this mean? What do you expect me to do? So now I can pick my own salary? Are you crazy?” says Gałkiewicz.

The process of self-setting salaries varies across companies. But generally, the employee spends time researching what others in similar roles are paid in the wider market. They then create a business case about why their salary should be increased based on their performance — and, in Raganarson’s case, how they align with the values of growth, openness and commitment — while factoring in the company’s financial position.

The employee shares their business case with the wider team and receives feedback about whether or not what they are asking for is fair. This could be a formal committee at a bigger company, or just a Slack chat at a smaller one. Based on this input, the employee then makes the final decision on what their salary should be.

Salaries for new hires are “negotiated in a standard way”, says Gałkiewicz.

The company has a salary range for each position, and will set the person’s salary within this range depending on the candidate’s level of experience. 

“People have no clue about the process and how they might position themselves on the ladder, let’s say of salaries. But once they join, they can participate in the process like everyone else.”

The benefits of letting your staff pick their own salaries

Following in the footsteps of large US companies such as Whole Foods and Buffer, some startups in Europe have experimented with transparent salaries — disclosing everyone’s pay internally — in order to combat the frustration, office gossip and mistrust in management that the traditional opaque system can spark.

But for some founders, having transparent salaries doesn’t go far enough to achieve equality.

“Making salaries transparent is like pinning the payroll to a wall in a shared space. Everyone can see what everyone else earns, but if employees think there is unfairness they have no influence in changing that,” says Pawel Brodzinski, CEO at Lunar Logic. The company introduced a self-set salary policy to the company — now 35 employees — in 2014.

Pawel Brodzinski, CEO of Lunar Logic

With self-set salaries, everyone has control. There are “no behind-closed-doors negotiations that promote the best negotiators, nor the best performers,” says Brodzinski, and there is far less frustration.

“Since the whole process is transparent, the rules of the game are clear to everyone. It doesn’t mean that frustration doesn’t happen at all, but it’s far more manageable than in a traditional system,” he adds. 

Another benefit of self-set salaries is that employees acquire a better understanding of how compensation affects the overall economics of an organisation, and they also gain personal financial skills. 

“People understand how the market values their skills and how they should position themselves among their peers,” says Gałkiewicz. “It also influences people, for instance, to start saving money or to start investing money because talking about it openly means (employees) can learn from each other.”

The drawbacks

For 360Learning, a collaborative learning platform, the concept of allowing employees to set their own salaries is highly problematic. It believes the process breeds unfairness, and allows those with the best negotiation skills — who are statistically men — to secure the best deal, thus contributing to the gender pay gap. (Though Brodzinski says a happy result of the self-set salary process in his case was that Lunar Logic has no gender pay gap, and that the best-earning people in any given role are routinely not men.)

360Learning has, since 2019, removed all negotiation with employees from its salary process and instead uses salary bands — which are calculated using data about the market rate for each job. 

“If people don’t agree, they can leave,” says CEO Nick Hernandez, though few employees have complained about the process so far.

Hernandez says that managers and employees like not having the “negotiation burden” placed on them when it’s time for salaries to be adjusted, as these conversations are usually uncomfortable for both sides. The system works, he adds, because he’s consciously built a culture where people don’t necessarily have to have the “loudest voice” to succeed, but are nevertheless smart and thoughtful people who are happy to work independently.

Gałkiewicz agrees that self-set salaries has its drawbacks, especially when it comes to securing talent. If salaries are hidden from employees, and a candidate a company really wants to hire is asking for 30% more than the offer, it can afford to make a handful of exceptions. 

“But if (salaries) are open, you can’t make exceptions all the time as employees won’t feel like they’re being treated in a fair way, so this can be problematic for employers,” he says. 

Although, he contends, it’s just a matter of defining, as a team, your approach to this problem: “Are you a company that can make exceptions in specific circumstances or not?”

Ragnarson is also “introducing some limitations” to make sure that employees can’t give whatever price tag they imagine. Especially as the majority of the team are software engineers with a high price tag.

“We need to have a budget, and everyone’s expectations should fit into that budget.”

Adjusting salary setting with scale

As with any other company process, the process of self-setting salaries has to be adjusted with scale. As a team grows to 100-200 employees, it’s logistically impossible to have every team member submitting feedback on one person’s salary — especially as not everybody would know each other and could comment on each other’s performance. 

Brodzinski says that larger companies get around this problem by building a select committee of employees who aggregate everyone’s salary requests and provide feedback. If employees want to contest their pay, they are directed to a set conflict resolution process.

Self-set salaries can only work, however, in an environment where everyone cares about the company, and about each other, says Brodzinski. It worked for Lunar Logic because they already had a culture where anyone could make a decision — “so that if you are an intern today, you can fire me tomorrow,” Brodzinski says — and actively input on the direction the company is going in. 

“It’s not self-set salaries in isolation; it’s more the whole approach”

Having an organisation “built around transparency and autonomy” has helped the company retain talent too. “But it’s not self-set salaries in isolation; it’s more the whole approach,” says Brodzinski.

One of the biggest obstacles for companies starting this process, says Gałkiewicz, is the mentality of the founder.

“As a founder, it’s very difficult to raise money, especially as a tech company, and then all of a sudden salaries are one of the biggest costs of the company. They think, ‘If I have no control over this cost, then it’s going to be a disaster’,” says Gałkiewicz.

“That might be true,” he adds, “if you have the wrong people, or you don’t educate them — or if the scale of your company is not in sync with the level of sophistication of your process. The devil is in the details.” 

Miriam Partington is Sifted’s DACH correspondent. She also covers future of work, coauthors Sifted’s Startup Life newsletter and tweets from @mparts_

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Philipp Schuch | gradar.com
Philipp Schuch | gradar.com

Here’s my view (for what it’s worth 😀)… In the hashtag blogosphere of the start-up / new work bubble, employees determining their own salaries is the latest revolutionary new idea. All employees, managers and owners sit at the negotiating table and work out the fairest salaries for the whole company in a conversation free of domination, free of information deficits, free of individual interests. At first glance, this sounds modern, fair, transparent and pretty hip! I just don’t think it takes into account some aspects of “real life”. First of all, is it really a new idea? As in many… Read more »

Michael Iasinskyi
Michael Iasinskyi

marxist startupers, I have seen it all