Human Resources

Transparent Compensation: Could It Work for You?

By EverwiseOctober 23, 2015

In recent months, several big name companies have made headlines for attempts at making compensation practices more equitable and transparent – and have been met by very mixed reactions.

Earlier this year, Ellen Pao, the – now former – interim-CEO of Reddit announced the company was doing away with salary negotiations, citing the fact that the practice unfairly disadvantages women. Some criticized Pao for eradicating the opportunity for anyone to negotiate, instead of helping women negotiate. Others pointed out that employees may be frustrated at not being able to influence their own compensation levels. This announcement came amidst Pao’s controversial gender discrimination lawsuit against her former employer, venture capital firm Kleiner Perkins Caufield and Byers.

Then, in July, news broke that Erica Baker a – now former – Google engineer created a spreadsheet which invited Google employees to share their salaries – and about 5% of the company did so. Some employees felt they weren’t being paid fairly, and used the spreadsheet to negotiate higher salaries. The spreadsheet also revealed some compensation biases against minorities and women. While not technically breaking any rules, Baker was reprimanded by her supervisor for sharing the document, and denied several “peer bonuses,” awarded to her by co-workers. She later left Google to work at Slack, a messaging software company.

With traditional compensation practices, salary range often remains unclear to candidates until an actual offer is made. Negotiation is anticipated, and so first offers are often much lower than an employer is actually willing to pay – a practice which disproportionately penalizes women – research consistently shows women are less likely to negotiate salary, and are viewed unfavorably when they do so – and minorities of both genders. Employees are sometimes discouraged from sharing salary levels with one another – even though it is perfectly legal. Higher wages, bonuses and raises are more likely to be awarded to employees with strong negotiation skills, rather than solely performance-based. These policies can create cultures of concealment, discriminatory compensation practices, and feelings of resentment and jealousy among employees. Not a great culture to work in, right?

There is a recent trend in improving equitable and transparent compensation practices – whether through polices implemented by management, like Reddit, employees taking things into their own hands, like Google, or sites like Glassdoor, which encourages employees to post their salaries anonymously. While some of these cases have been controversial, and salary transparency isn’t a perfect fit for every work culture, other companies have implemented practices to improve compensation practices with more success.

Here’s a closer look at three companies where salary transparency works.

Paying Market Rate: Netflix

Netflix is known for a company culture of “Freedom and Responsibility” and has made headlines recently for its generous parental leave policy. Back in 2009, CEO Reed Hastings released a game-changing document detailing the company’s philosophies on hiring, leadership development, and compensation.

Netflix essentially has two practices, outlined in the HR document, to make compensation equitable and transparent:

  1. They are clear about how they determine compensation.
    How many times have you read a job description that says, “salary commensurate with experience?” Not very enlightening, right? Netflix is more clear in how they calculate appropriate offers. Their policy is to evaluate three things – what the employee could earn in a similar position elsewhere, what they would cost to replace, and what Netflix would be willing to pay to keep them, should they consider leaving for another job.
  2. They pay “top-of-market” rate.
    By evaluating those three factors, Netflix pays “top-of-market” rate for all positions. This policy helps Netflix offer some of the most competitive salaries in its industry, attract top talent, and keep current employees happy. As one of the top-paying companies in the US, according to a 2015 report, Netflix is less likely to lose employees based solely on a higher offer elsewhere.

So, what impact do these policies have on employees? For one, transparent compensation practices can help to level the playing field for women and minorities, who are often at a disadvantage when salary negotiation is involved. Netflix salary offers reflect the top-of-market value of the position – rather than the lowest amount an employee is willing to accept.

On Glassdoor, more than 500 current and former employees have reviewed Netflix. The “Compensation & Benefits” are rated a high 4.2 out of 5 stars. This does not necessarily reflect the overall employee opinion of the company – Netflix has an overall rating of 3.5 stars, with lower ratings in the areas of “Work/Life Balance,” “Senior Management” and “Career Opportunities.”

While there are mixed reviews for the culture of the company, the compensation practices at Netflix are generally praised by both employees and industry experts. Some other companies, like Metageek, have even adopted compensation policies based on those of Netflix.

Transparent Salaries: Buffer

Buffer – a publishing tool for social media – strives to create a culture that “defaults to transparency,” which includes revenue and user stats, emails, progress reports and – you guessed it – employees’ salaries. Buffer has a simple formula to calculate salaries, which includes job type, seniority, experience, location, and equity. In other words – salary is set based only on these factors, and is not impacted by negotiating skills. They aim to set salaries “a little bit above market,” so they rarely lose employees due to higher offers from other companies. In addition to sharing their compensation calculations, Buffer takes it one step further – every employee’s salary is disclosed on a public spreadsheet.

Why does Buffer do this? They believe that “transparency breeds trust and trust is the foundation of great teamwork.” While some potential candidates were scared off by the radical policies, CEO Joel Gascoigne insists, “it scares the right people away.”

Most employees report being satisfied with the compensation policies, and the company has experienced very low turnover. However, since employees know exactly what their co-workers are earning, Buffer has had a few issues with jealousy, and a few employees wanting higher compensation. But overall, the culture does not breed jealousy. According to Gascoigne, “Generally, jealousy’s not an issue because of the forces of all the values in the company.”

Gascoigne has noticed other tech companies have embraced transparent compensation policies as well, and recommends taking small steps to see if it’s a good cultural fit. The policy is attractive to many candidates – after going public with staff salaries, Buffer was inundated with résumés. Gascoigne explains, “It kind of feels like this is somewhat of a movement bubbling up here.”

No Negotiating: Magoosh

Magoosh, a startup that offers study tools for test prep, does not negotiate salaries. CEO Bhavin Parikh explains that his reasoning includes, “maintaining a culture of fairness and respect, and ultimately contributing to the well-being of your company for the long term.”

He cites the fact that men are more likely than women to negotiate, and he does not wish to contribute to the gender pay gap. Parikh also states that if two employees doing similar work share their salaries with one another, he would want them to each feel they were paid fairly. He points out that negotiations can “reward an employee’s ability to negotiate rather than their actual contributions to the company.” He believes salary should be viewed as merit-based, not subjective.

Like Netflix and Buffer, Magoosh also supports the practice of being clear on how compensation is calculated. “Your system should allow you to manage compensation – from starting salaries, to raises, to bonuses – in an objective what that’s clear to employees.” Parikh evaluates three things: individual performance, company performance, and market rates, to determine salary.

How does the policy actually impact his employees? Parikh says there has been very low turnover in more than five years, and a 90% acceptance rate of more than 30 job offers. He admits the policy may turn off some candidates – but they wouldn’t be a great fit for the culture, anyway. In a small, “scrappy company,” he wants to hire those who are passionate about learning and contributing to the business, not employees who are primarily motivated by money – which is why they pay in the 50th percentile (rather than “top-of-market” rates).

Other evidence of employee satisfaction with the culture of fairness and transparency? Magoosh was recognized as the “Happiest Company” in education in 2015 by TINYPulse. After collecting feedback from employees at more than 500 companies, Magoosh had the highest happiness rating.

Should Your Company Consider Salary Transparency?

The trend in adopting transparent salary policies is much more common among small tech companies like Buffer, Magoosh, and Reddit. They are able to be more innovative and flexible than other companies – it’s easier to solve employee compensation concerns one-on-one, hear employee ideas to improve policies, and adjust policies as needed. They have only a handful of employees to keep satisfied. But some large companies like Netflix – with 2,450 employees – have also successfully implemented transparent compensation policies. Netflix, Magoosh, and Buffer have all been very open about their compensation practices. From public presentation decks to blogs to numerous interviews on the topic, each of these companies’ CEO’s has expressed a desire to influence other companies’ compensation practices for the better. While making every employee’s salary public or prohibiting negotiations is not realistic for many companies, one feasible practice is being transparent about how compensation is calculated.

It’s a topic worth discussing. Are your company’s offers, bonuses, and raises subjective, or based on merit? Do employees doing comparable work have different salaries? Are employees with stronger negotiating skills rewarded with more money, and is that fair? Are women and minorities paid less than others? What would happen if two employees shared their salaries with one another – would one of them feel undervalued?

When employers are clear about how they calculate compensation, they help create a culture of trust and fairness. They can help level the playing field for women and minorities. They lower the chances of employees feeling undervalued. Like Buffer’s CEO says, “Experiment with transparency in a small way. You don’t have to go as far as posting everyone’s salary on the blog.”

Everwise

Everwise

About the Author

Everwise connects employees with the people, resources and feedback they need to be more productive and successful at every stage of their career. Request a Demo: https://www.geteverwise.com/requestdemo/

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