Should start-up employees set their own salaries?

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! It just doesn't take into account some aspects of "real life".

First of all, is it really a new idea? As in many cases in the New Work sphere, it’s just old wine in new bottles. The notion of individuals in a trade or industry joining together to jointly negotiate and set prices for wages, goods and services has been around since the Middle Ages, initially in guilds, which laid the conceptual foundation for the idea of cooperatives. In the course of industrialisation, the first modern-style cooperatives emerged in the mid-19th century in Great Britain and later also in German-speaking countries. In these structures, the employees are at the same time co-owners of the company and can exercise their voting rights in company decisions in proportion to their ownership shares, i.e. they can also vote on prices, salaries, budgets and the company's objectives.

Gradar

This leads us to the first issue, though. In very few start-ups are all employees equal shareholders. Negotiations about salaries and budgets therefore always take place within the framework of a power imbalance between the owners and the dependent employees. The owners can take over the decision-making power at any time and the whole process would only be the illusion of participation.

Not just that, but there are clear information deficits among individual employees. Not every person in the company is able or willing to do budget planning, to do intensive market research or to understand the positions in the company in the depth necessary for the process. Also, different levels of knowledge about the bargaining position or "market power" of those involved can make for less equitable outcomes.

And, even beyond that, there are a number of subjective influencing factors that can have a negative impact on the fairness of self-given salaries. The perceived importance of a person can have a significant impact on the pay of the job. Good or aggressive negotiators achieve better results than more reserved personalities. Informal hierarchies or alliances can influence the process unconsciously. In the worst case, discrimination potentials are even reinforced.

Even if the potential problems of social and organisational interaction in this process can be eliminated or remedied, the total participation approach presents profound structural challenges. A central principle for achieving pay equity is the maxim of "equal pay for equal work / work of equal value". In a homogeneous and manageable population, gut feeling or perception in day-to-day operations may be a sufficient guide to remunerate jobs that are comparable equally. In the first phase of a start-up's life, the team is often composed of similar roles that can still be made comparable via non-analytical considerations if necessary.

As the company continues to grow and the roles become more differentiated and the organisation expands to include new departments or disciplines, problems arise. For a fair allocation of salary amounts or bands, jobs must therefore be evaluated analytically in order to make jobs from different functional families with different tasks and responsibilities comparable. In doing so, the profiles of the jobs are sharpened and all those involved have a common and clear understanding of the relations between the values of the jobs in the company.

This project requires professional expertise that can’t usually be found in the general workforce and is therefore a genuine HR task for good reason. That’s not to say that the process should be carried out without staff participation and that the results are never communicated - but this transparency needs to be explained and accompanied by professionals.

An analytical job evaluation with a common frame of reference also solves the problem of the validity of the external benchmarks used. Many openly accessible portals on the internet use only a few criteria such as job title, qualification and years of work, possibly industry, to output a comparative salary. The quality and validity of the data available isn’t always guaranteed, as no quality-checked data reports from companies are used here - rather information from individuals is the primary source. The validity of the data and the transparency of the methodology are often questionable.

If jobs are assessed through a proven standard system, there is the possibility to combine the assessment results with validated market data sets from established providers and thus obtain a more realistic picture of the market price of a job. Ideally, a peer-group report is used here, which offers the relevant data sets for the company by industry, turnover and size.

Finally, a job architecture derived from the analytical assessment offers the opportunity to analyse the actual distribution of salaries and the distribution of gender across grades and to identify and address potential for discrimination.

So, involving employees in salary determination looks to be a challenging project with many risks. The process alone is no guarantee of pay equity. The people involved in the negotiations must be fully informed about budgets, comparability of job profiles, equal pay aspects and possibilities and limitations of external market data.