Why I Made My Company’s Compensation More Structured

Problem

My company, Pilot, has gone through a very interesting transition in terms of how we approach compensation. Initially, we would negotiate compensation by discussing salary expectations and then going back and forth until we agreed on a figure with the new hire. We used a similar approach with our existing employees, both during performance reviews and, at times, when an employee raised it with us.

Actions taken

Initially, I thought this process was good because our employees should be able to convince their manager as to why they deserve a higher salary. Conceptually, it was clear to me that if someone was able to explain why they deserve more and everyone else agreed, it was a good process to use to agree on new salaries.

"People's willingness to ask for compensation increases is not very strongly correlated with the work they do and it's more of a personal trait."

However, there's a very important caveat. People's willingness to ask for compensation increases is not very strongly correlated with the work they do and it's more of a personal trait. A lot of companies forget that there is a huge opportunity cost associated with non-participation in business processes because people who are less likely to ask for a raise will end up being underpaid.

"We decided to set up a fairer process where we would reward people based on the skills they had."

Some people tend to be less comfortable with asking for compensation, while others are a little more aggressive and may even ask when they don't really deserve it. In addition, some people may just be shy about asking for more money and you shouldn't punish someone for not asking.

We decided to set up a fairer process where we would reward people based on the skills they had. We removed all negotiation components from salary conversations. We have a career ladder with different levels, and people are expected to meet various criteria to meet the different levels. Each level comes with a set salary and it's non-negotiable. The same applies to new hires.

We also only have conversations about salaries at set intervals. We review if everyone is at the right level once a year, and then every four months employees (or their managers) can nominate themselves to be reviewed.

Pilot's mission is to create a more open worldwide job market. We have a number of remote employees, so one of the things we are trying to do is to ensure that you aren't discriminated against based on your location. Often, people don't see anything wrong with paying San Francisco employees more than employees in Europe.

You can argue someone's cost of living is higher and they, therefore, need more money to maintain the same standard of living. However, we decided that because our company is very distributed and we are trying to help create a more open worldwide job market, we should do as much as we can to minimize discrepancies between countries. Because of this, we are selective about the areas and countries we hire in and then we benchmark salaries to the most expensive country we are comfortable hiring in.

Lessons learned

Ultimately, compensation comes down to what your incentives are and what you want to reward. You can roll out a new compensation process in stages, but the important thing to focus on is ensuring that your compensation scheme is fair and that negotiation skills don't factor into compensation.