Fairness in Salaries

Fairness is a topic a lot of people talk about and that’s dear to most people. Everyone thinks things should be handled fairly. Everyone agrees fairness is important. Nevertheless there is a lot of discussion about fairness. Sometimes the discussion in companies is about salary fairness.

The reason for discontent and thoughts about unfairness is that people have very different ideas about what is fair. They base salary fairness on different things. Some think it’s fair to base salary on past performance, current performace, past performance and future potential, needs, equality, experience or current market demand.

To someone who bases salary fairness on equality?—?everyone with the same job should earn the same money?—?it looks unfair if you base salary on performance. To someone who is motivated by winning and by performance, basing the salary on equality looks unfair. Some people think you should base salary on needs?—?a position often held by government organizations (e.g. in Germany). People therefore should be paid more if they support a husband or wife or have children, or live in a more expensive region. Some companies base their salary and promotions on past performance and future potential. Often they overpay for the present in the hope that the person will unfold her potential in the future. Some people think they should be paid by experience, by the projects they have done, the technologies they know and bring to the table. These will find it unfair if someone with less experience?—?but better performance perhaps?—?earns more money than they do. For many people the absolute level of their salary is not as important as being paid fairly compared to their colleagues.

Because everyone has different opinions on what a fair salary means, it is important to not only be transparent on what goes into your salary but also listen to what the people in your company think is fair. I sometimes get asked how to structure salaries for engineering, I usually reply with “Why not ask the people in your company?”. Being transparent does not mean telling everyone what everyone else earns, this often leads to grumpled employees because 50% will most often earn less than the other 50% for unknown reasons to them. But transparency means you need to explain on what your salary system is based, on experience, performance, need or market demand. Or any combination of these factors.

Fogcreek is one of the companies that are very transparent on what factors determine the salary. Joel, Fogcreeks CEO, explains in “Why I Never Let Employees Negotiate a Raise” how his company structures their salary. The salary levels for engineering go from 9 to 14 and are based on scope, experience and skill. They are also adapted for everyone based on market prices going up. With a clear formula and guidance everyone can arrive at his level based on his experience, scope and skills. No wondering why your colleage might earn more.

One phenomenon to take into consideration is salary inversion. If you hire engineers when the market for engineers is tight, you might overpay compared to your existing employees. A Junior developer might end up with a higher salary than your senior guys. Depending on the common understanding of fairness at your company, this leads to problems. So it’s important to manage salary when hiring?—?e.g. by larger signing bonuses?—?and also to lift your existing salary base.

A comparable phenomenon is very often seen in startups when they grow. Early employees often earn less than employees that are hired later. This leads to challenges in M&A when the startup is bought by a larger company and needs to be managed, e.g. by raising salaries of the employees that have been there from startup times.

Another source of perceived unfairness are salary raises and promotions. In many companies these are handed out to those that are best at being loud or playing political games. In startups this often means being close to the CEO. Another way is when employees come up with offers from competitors and put their job on the line. As Ben Horowitz writes in “How to Minimize Politics in Your Company” the best way to prevent this kind of unfairness is to have strict processes around compensation, bonuses and promitions?—?and I wholeheartedly agree with him there.

Then there is gender equality, which often leads to unfair payment when it’s a common practice in your hiring process to negotiate salaries?—?the prevalent way to do things in my experience. There are different opinions and studies on why women earn less for the same job than their male counterparts. Ignroring the point that it’s not clear?—?see above?—?what ‘same job’ means, women often are not as risk loving in hiring situations. Where many men (for sure not all) ask for some % more than their comfort zone and risk not getting the job, some studies say women are more conservative. So if negotiating salaries is part of your hiring process, be aware that you might underpay women compared to your male employees. Which coming back to the title of this essay, is not perceived as fair by most people.

As shown there are many considerations and factors that go into fair salary levels. Keep these transparent and be aware of diverging salaries of your employees over time.