In large corporations, salaries are usually determined by published pay scales. It is common for all employees to know how much each other earns, at least in very general (or at least, to have access to the information if they wanted to).
In small businesses, however, salary information tends to be highly protected information. Employees work in in small groups and often know each other well. Furthermore, individuals are often employed at the discretion of an owner, and bonuses and salary increases are on the basis of negotiation and how much is necessary to keep someone. Consequently, how much everybody earns is a closely guarded secret.
In this piece, I look at three businesses who share salary information and look at the positive impact this has on the business, and also the challenges. Two of the businesses have c40-50 employees, one 220.
My thanks to Henry Pipe of Max Fordham, Wen Quek of Cullinan Studio, and Fiona Welch of Collective Architecture for sparing their time and knowledge.
One of the potential advantages of being owned by an employee ownership trust (EOT) is a culture of openness and sharing. This does, however, take preparation and a conscious effort. If the profit of the business is shared with employees in a transparent way, and one which (by the terms of the trust) is broadly equitable, so co-workers should come to see each other as partners.
If the business has worked on its employee engagement and giving the employees a voice, then a spirit of collaboration should develop. This is particularly the case if the company has spent time on their Flag (the purpose of the business).
The sharing of salary information is often seen as the ultimate test of this new spirit. This is not to suggest that it is necessarily desirable, or essential to the success of a business. It does suggest, however, that a business where all employees agree each other’s salaries must surely need to be a place of truly collaborative working. We, therefore, wish to consider if the advantages outweigh any possible disadvantages and if this is a process that it is worth a business pursuing.
In order for salary information to be shared, a business needs to have a truly open culture. The company Max Fordham refer to a self-fulfilling circle of:
- and engagement.
Crucially, all three need to be in place in order for this open approach to be successful.
The process of sharing salary information, either when it is first introduced or at review time, needs to be fair and open. All the companies reported it to be a time-consuming process.
However, they also all agreed that spending this time is fruitful, not only in the positive outcome of trust that it engenders but in the way that it gives the opportunity to air views and issues.
This positive aspect of sharing salary information was repeated in different ways by each of the three companies.
Process – The Rationale
Two of the companies have been sharing salary information for many decades. The third is more new to the process but has still been transparent for 10 years or so.
Each of the companies has a transparent structure behind their salary system. One company has constructed a spreadsheet of salaries bands using a number of factors, based around roles, responsibilities and experience.
One of the companies has a system of hourly rates, in order to reward those who deliver more hours i.e. work harder. This hourly rate is then the subject of discussion for each employee.
Another has a skills and competency matrix. Crucially, this includes ‘capacity’, reflecting the opportunities people were able to benefit from (both in the positive sense, being involved in profitable projects, and negative in terms of being unable to participate in profitable projects, for example by being involved in speculative projects, or through having children).
Process – Implementation
With a set of terms that everybody has lived with for several years and therefore agreed, a broadly similar process then follows.
- Self assessment, for example, according to the competencies for matrix (the employee prepares their case);
- Meeting with peers or supervisor to agree/discuss the outcome of the self-assessment;
- There may next be a moderation level between the supervisors to ensure everyone is being treated in a similar fashion;
- A group meeting is then held with all qualified employees to discuss and agree the proposals;
- There may also be an appeals procedure;
During the meeting, anyone is encouraged to raise an objection or discuss the proposed changes. Crucially, these meetings rarely become difficult as a comprehensive procedure has been followed which is open and transparent to everyone. There are no surprises at this meeting because everyone understands the rationale and the fairness of the system.
Other business decisions may be made at such a meeting, for example choosing management or board members.
All three companies have an initial period before a new employee would be part of the open pay scales. Employees not yet part of the system are invited to sit in on the discussions, although not taking an active part or having a vote. In this way, they were able to feel comfortable with the system before being part of it.
Having an open pay scale means there is no negotiation of salary at interview. Some people are better at negotiating that than others, which is how one person can work for the business on a higher salary than another despite doing the same job. This is also an issue at appraisal time. By having shared salary information this disparity slowly disappears.
Disparity Up The Pyramid
One possible disadvantage of transparency is that the business is not able to overpay for someone who may be a highflyer. It may also mean that somebody with fewer years before retirement, who needs to maximise their earnings, may not wish to join the company. All companies admitted they may have lost out on certain employees that they would liked to have joined them – but that the advantages clearly outweighed those disadvantages. There was a feeling that employing someone who thought they deserved more than others doing a similar job could be divisive.
Other examples of the system working against hiring or keeping talent included a senior employee being be tempted to leave if offered a large increase in pay, for example, if they moved to be a partner in a competitor who is not employee owned. Another possibility would be if someone is offered the option to buy in to another firm.
The net result is that “You do end up with people who aren’t purely financially motivated,” according to Fiona Welch. Of course, assuming the company does well, then under the EOT system, the profit distribution can be used to provide a remedy for this.
The flipside of employees who are not focused on money is a very high employee retention rate. This loyalty aspect was high in each of the three companies. As Wen Quek comments, “Sharing salary information may have restricted growth of the business at times, but we’re not unhappy with that – we like our business!”
Thinking Like Business Owners
A really positive outcome of having everyone involved in setting and agreeing each other’s salaries is that everyone gets to see the bigger picture.
A common challenge for employee owned businesses is to encourage employees to think like business owners. By sharing the rationale behind business decisions, for example how salaries are put together, including job descriptions, roles and responsibilities, et cetera, then they are more likely to understand how the business works.
For many businesses, the idea of having a meeting with all employees to discuss everyone’s salaries is unthinkable.
Those three pillars that are so important, transparency, trust and engagement, need to be built together. They do not come overnight, but grow with time, and each helps the other.
A halfway house, therefore, is to construct salary bands without being specific as to each individual within those bands. This first dip of the toe in the water of transparency will begin to breed trust, which in itself will breed engagement and enable further transparency.
Sharing salary information should, therefore, be seen as part of the transition to employee ownership.
Ultimately, if the sharing of salary information is uncomfortable for an employee, there may be other reasons. As Fiona Welch commented, “If you can justify your salary, what is the concern?“
Although transparency of salary information requires a great deal of effort in order for it to work, there was no question amongst the three companies that they would not want it to be any other way. Wen Quek commented that there would be huge resistance amongst employees if they stopped being open with salaries, and Henry Pipe commented that employees become a strong advocate for the sharing of salary information and that many comment that “a transparent and fair pay system is one of the best things about working for this business.”
If you would like to learn more about how we work, why not visit our events page, by clicking here.