Employees assess themselves and set their own pay

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Why not?  It can work. Here is an example from the book A Radical Enterprise by Matt Parker:

the employees at Pod Group have self-managed compensation without bringing financial ruin upon the company, as Theory X would predict. As their CEO explains, Employees are aware that the level of positive recognition from each of their colleagues will also take into account the salary earned. If colleagues think you are earning too much money, there is a very real danger that your interaction with them will change. As most people value peer camaraderie, they don’t want to appear greedy in the eyes of their colleagues. Since implementing self-managed pay in 2017, Pod Group has seen salaries rise around 10% above their previous level. However, they have also seen their retention rate skyrocket at the same time. Since the recruiting and training cost of replacing an employee that quits is conservatively estimated at twice that of the employee’s annual pay, the 10% increase in salaries has been more than offset by the increase in retention. If anything, Pod Group is saving money.

I’ve been searching for ideas for “teal” pay systems for our clients. There aren’t many I’ve found yet and I don’t find them satisfying.

Group vs individual performance

The first issue to deal with is that the results of knowledge work (as compare to transactional work) cannot be measured at an individual level.  It is a team sport.  Individuals contribute in different ways, almost impossible (and very expensive) to unravel.  So we should reward the group not the individual for results (more below).  So how do we pay an individual?

We could give the money to the team and let them sort it out amongst themselves, but that doesn’t solve the problem, only transfer it.  We still need a way to apportion the money to each person.

Outcomes vs effort

A while ago, generally accepted thinking went from rewarding output (producing work) to rewarding outcome (producing value).  This has an issue. If you reward outcomes, you reward the lucky.
In a VUCA world this was never more true. Outcomes are unpredictable, and systems are never fully in our control. So your reward (and praise) system becomes a lottery. When hard work is unrewarded, and a fluke is generously rewarded, people become cynical and unmotivated.

What’s more, paying performance has perverse outcomes. People pursue what’s measured not what we want.

Sofia Woloschin said in a LinkedIn comment: we must move away from an extraction mindset.

Google talk about rewarding effort. This is insightful, and has influenced me.

If we move to rewarding effort, we must ensure that does not fall back to rewarding work for its own sake. Effort towards what? How do we recognise good effort?

Shu Ha Ri

I’d go further than Google to say we should reward effort and mastery. As Carol Dweck points out

It’s critical to reward not just effort but learning and progress

At Teal Unicorn, we use the Shu-Ha-Ri model to help staff self-evaluate their skill level. As their skills grow, their base pay grows, and possibly their bonus if it is proportional.

But we still have to come up with complex algorithms to calculate pay from effort and mastery.  They will never satisfy everyone.

Flat pay

The “Deming model” (Deming called evaluation of individuals one the seven deadly diseases of management) was to avoid the arguments by paying a published base salary that goes up every year with length of service, and nothing else.

This is nice and neutral,  but it reward people for just hanging around longer.

Sharing the wealth

If we pay effort and mastery, not output or value, how do we deal with success?

Deming said don’t. But I believe in sharing the wealth, and in celebrating success.  Just don’t attribute success to an individual.  So “pay the team”.

Personally, I’d share a bonus across the whole company, not a team, proportional to base salary.  Which still leaves us with the problem of setting the base salary.

Leave it to the individual

Which brings us back to perhaps the easiest answer: leave it up to the individual.

Nobody knows how someone has performed better than the person themself does. I’ve been trying to put my finger on the cause of my discomfort with measuring people. I think I’m closer. People are complex systems. There is no clear causality, and all results are the product of the interplay of myriad factors. So a few distilled numbers always seem to me to be overly simplistic, not really informative of the actual situation, and always unfair. I’m coming to the conclusion that the only fair and reasonable way to understand a fellow human, or their work, is subjectively.

More than that, the best person to make that assessment is the individual. Next best are those who work with them closely.  Nobody can assess another human accurately: we have our own biases, and we have a very limited view of their activity. Our feedback it useful to help them, but the individual should build the picture.  Please, please don’t provide such feedback in performance reviews.

Numbers based systems don’t work, nor do the opinions of managers away from the daily work.

So let people set their own pay. Make it fully transparent, and invite the scrutiny and feedback of their peers and managers. Have a system for dealing with dysfunctional exceptions.

Dealing with selfishness

Undoubtedly, some people will claim more than is right.  They may genuinely have a disproportionate view of themself, or they may try to take more than is fair.

We can deal with this in a number of ways, but first we must note that behavioral deviance (of any kind) should be dealt with outside the normal process flows, not by burdening the work with extra controls, regulations, and approvals, to punish everyone for the sins of a few.  The better your culture, the less of them you will have.  We can:

  • create a peer expectation of empathy, collaboration, ethics and morality.
  • provide better feedback to calibrate their self-assessment.
  • have more team open discussions where behaviour can be called out, preferably in a non-violent, open way.
  • deal with the sources of deviance – most are outside the individual.
  • provide channels for staff to confidentially escalate concerns.
  • ensure people managers front up the hard aspects of their job and don’t evade necessary confrontation.

Pay more

Of course base salaries will generally be higher, because most HR departments and employing managers screw people down to the minimum they will accept, not pay the maximum the organisation can afford.  You want to retain staff? Pay them more.  So you will need more money for payroll. Get it from reduced recruiting and onboarding costs, and increased productivity.

 

This may not work in existing organisations that have a lot of cultural debt: resentment, cynicism, bad ethics. But it might. It is certainly worth considering in healthier cultures.