What I’ve learned as a CEO from a year of self-set salaries

Why we tried self-set salaries

Evaluating people and setting their salaries are challenging tasks. You often do not know most of the people, whom you hire, well enough to accurately assess their levels of skill and effort. You may not even always collaborate closely enough on a daily basis in the long-run to make that assessment. You often may not be able to evaluate how well they are performing in their area of expertise or what they are able to add in addition to their defined job tasks.

Many companies create a performance review process, which is typically based on several common criteria. If someone exceeds expectations in most of the areas, there is a chance they may get noticed. However, there is a huge concern with these models:

• It can be difficult to decide what is most important.
• It can be hard to quantify the value of the employees’ deliverables.

The more you tweak the performance review tool, the more complex it gets. Moreover, people will always try to find ways to game the system. They focus on earning a high score rather than concentrating on providing long-term value for the company and themselves. There are probably dozens of other pros and cons, but I am focusing here on our biggest challenges with our previous process.

Our goal was to:

• Assist people in better understanding how difficult the review process is and helping them to develop their relevant skills by boosting their ownership of their professional development
• Avoid creating complicated and flawed performance review models and less effective incentive structures
• Share responsibility
• Hopefully, create a performance review tool that works better on average over the long-term

Our environment

I do not want to claim that our approach will be an effective solution for everyone. On the contrary, we have a very specific environment, which I would like to quickly describe in order to provide context to our decision-making process.

We are a software development company in Poland. Most of the teams include 1 to 6 people, who work on projects, typically one project per customer. Our main focus is on blockchains and web applications for startup companies. The entire staff has been working remotely since the beginning in 2006. We have around 20+ people working for us at the moment.

So far, it’s pretty standard. What is unique about our company is our transparency and the self-management approach that we have implemented. The team is provided with as much context as necessary to effectively achieve their goals. We openly discuss and share our vision, values, goals, finances and challenges. We also try to decentralize the decision-making process. Most companies say they do, but few actually follow through. We truly take this to the extreme - everyone has access to all the data and information they might need. It’s a disruptive approach that runs counter to common practice.

The process

Our process is based on the different ideas described in Reinventing Organizations by Frederic Laloux. ¹

Every 6 months, we meet collectively in our office in Lodz. The process has only two rules so far:

• Everyone sets their own salary. No one else has the right to change it.
• Our management and I follow the same rule.

For a whole day, people sit in groups and collect feedback from each other about their performance over the last six months. They form groups spontaneously and spend as much time as needed. Everyone is aware that by the end of the day, they should have spoken with all of their relevant peers. If people have been working on separate teams during the last six months and barely know each other, there is little to be gained by exchanging feedback.

The day is structured as follows:

1. Quick reminder on how to provide constructive feedback and be respectful
2. Feedback within the first set of groups
3. Feedback within the second set of groups
4. Mingling with each other as needed
5. Collecting new salaries on a spreadsheet and a mutual discussion about if and when we can afford the new salaries since we have a sophisticated financial forecast system in place.

Lessons Learned

Here are the most important lessons that we have learned over the course of three feedback workshops that have been held thus far biannually.

Provide context

Financial condition

We wouldn’t even have thought about the idea of letting people set their salaries without our company’s already existing, built-in transparency. The team needs to know what other people’s salaries are, the present level of profit for the company, and the company’s expenses. Annual financial statements are not enough. They do not provide several essential details like the company’s month-by-month cash flow. We have experienced some tough months in the past, and we will probably have more in the future. If the staff is not aware of the company’s financial situation, it’s easy for them to ignore it completely. Since their salaries highly affect the profitability of our business, it could be a disaster in the long run to not be upfront about the current financial situation. The employees might set unrealistic salaries for themselves, which could cause bankruptcy or destroy their trust in the company and the system.

Market

Informing our staff about what the market offers was definitely a no-brainer. You cannot assume that your staff are all familiar with the current job market. They might confuse the competitive salary of a full-time employee and that of a freelancer/agency employee/startup employee, which may lead to very different financial expectations. We have clearly stated what other agencies within our industry are offering as employment packages and how we are positioned in relation. The goal was not to set strict boundaries but rather to provide a context.

Goals

When we went through the self-set-salary process for the first time, we were losing money for a number of reasons. It would have been easy for us to stall in our efforts by saying, “Guys, we can’t afford any raises at the moment.” Nobody wants to hear that because it usually results in an indefinite wait. Instead, we clearly explained the situation, presented our improvement plan and invited others to help by suggesting their own solutions. People were engaged and understanding. We mutually decided to postpone the raises by a few months.

Commons need to be managed

At the beginning, we didn’t know what to do about the problem posed by the tragedy of the commons. In our case, this meant that our profit could easily be eaten up by inflated salaries. Over the course of the experiment, we took a few steps that proved to be useful in avoiding this trap.

1. Engage everyone including yourself. People were very confused at first. They did not really comprehend what this new system was about. There needs to be someone, who can clearly explain the process and set an example by participating just as everyone else will. It helps you to minimize any potential bad behaviour.
2. Be wary of the scale effect. ² At first glance, the commons appear to be unmanaged. However, they actually are controlled by shame. People collect feedback, compare themselves against others’ performances and better understand what is happening at the company level. If the group is small enough, and shame is subject to a diseconomy of scale, a healthy environment is created that is full of accountability.

Self-evaluation is challenging

During the first workshop, we didn’t know how to encourage people to share negative feedback even when it was constructive. We ended up with a lot of praise and not necessarily any specific goals or examples of what to improve upon to truly become better. It took us an entire year to identify these two distinct problems, which were hampering constructive feedback:

1. People did not know how to effectively evaluate others and especially not themselves.
2. Peer-to-peer feedback was not a deeply ingrained practice in our culture, especially among people working on different teams.

Fortunately, we already had everything we needed to fix these two problems in place.

Core Values

I am extremely proud of our company’s culture. It took us numerous months to identify and state them explicitly. Everyone was involved in the process of formulating our core values. ³ What I am even more pleased about is the fact that we truly live by them. Therefore, it was natural to put them to use during these workshops.

What we failed to do during the first two workshops was to present an example of an effective evaluation on which they could base theirs. We did provide one later on, and it not only helped our employees to become better evaluators but also made the feedback more comprehensive and structured.

A good example of one of our core values is “Delivering Value.” It is easy to stay busy and have a lot of tasks due. However, does it add any short- or long-term value? Is the company going to be better positioned by these tasks, or are we merely keeping the wheel spinning? Depending on your role at the company, it is important that your performance be measured against corresponding goals and/or qualitative and quantitative metrics. ⁴

P2P feedback

The management team had been conducting one-on-ones with our employees for quite some time. We have always spoken with everyone on a monthly basis, and this practice is still in place.

During the second workshop, we realized that collecting feedback from our peers every 6 months might not be enough. People wanted more frequent and specific feedback. We invited them to do so by proposing a simple framework that allowed them to consult with their peers more regularly.

Conclusion

It’s extremely difficult to measure our approach against a traditional one. We could evaluate which approach was more profitable over time, but for now, the experiment has been too short in duration for any accurate analysis. On the other hand, how do you determine the true value of the positive feedback that you receive from the people with whom you work? So far, it’s been a rewarding and valuable experience. It’s the kind of environment that we envisioned. I am curious how you and your company have experimented and the approaches that you have tried. What are your experiences with the self-management approach? What has been successful, and what have been the pitfalls? Feel free to share any questions and comments on Twitter.

Notes