Gravity Payments CEO Dan Price was lauded back in April for raising the minimum salary in his company to $70,000. Since then, he’s lost employees and customers over the decision and is having some personal financial difficulties. All of this begs the question: How should leaders handle pay in their organizations?
Pay in particular is often one of the most contentious areas for employees. It’s human nature to feel underpaid. Fundamentally, as Daniel Pink outlined in his TED talk, people are motivated more by intrinsic rewards than extrinsic ones such as pay. However, employees can be demotivated if they perceive pay -- theirs or others’ -- to be unfair. The real problem arises when employees think decisions on pay are made arbitrarily, or that management is showing unjustified favoritism. This was the case with the employees who left Gravity Payments.
With this in mind, here is what I have found that works in my organizations.
1. Decouple pay from the review process.
Instead of reviewing the whole company on an annual basis, analyze employee salaries every six months based upon start date, independent of the performance review process. This way, the entire company will not be focused on -- and distracted by -- finding out their pay at the same time every year. Discussions of performance will be much more constructive.
2. Pay fair market value based on objective data rather than subjective opinions.
Tie starting pay and regular raises to third-party data showing the value each person has in the market. Determine market pay as objectively as possible using industry-specific salary surveys. Pay for market value, manage people for performance. This makes compensation conversations much less antagonistic.
When entrepreneurs take salary off the table by paying people fair market value, employees can focus on what really rewards them: performing at their peak, improving their skills, and making a difference. In addition, leaders can better determine why employees leave. Many managers claim that their employees quit over salary issues, but survey after survey has shown that compensation is not one of the top reasons that people change jobs. Top performers cite lack of leadership and poor management much more often than salary and benefits. Any time a manager tells me that a top employee left over salary, I am always suspicious.
Leaving a job is a big decision, and most employees won’t quit over a five to 10 percent pay increase if everything else is good. For most people, it takes more than a 20 percent bump for them to consider leaving over salary alone. In this case, the manager likely allowed the employee’s compensation to deviate too far from fair market value. If a company and manager are closely tracking the market, it will be rare for employees to receive offers that are much higher than what they are making. This is why companies must base their salary adjustments on market conditions and not merely on a fixed rate of inflation each year, as many large companies do.
3. Always focus on other incentives besides pay.
Of course, there is much more to retaining employees than pay, including hiring the right management team and creating a high-performance culture. Start with these basics, and then find other ways to reward top performers, including stock options, training and development opportunities, and other incentives.