The best way to negotiate compensation with your Team (Hint: Don’t…)

I’ve had some interesting discussions recently on the topic of negotiating pay for new or existing team members. Here are some thoughts I wrote on this and thought I would share on LinkedIn.?

It is worth noting that many companies do indeed use the approach outlined here to achieve fair pay. However, I have found that some companies (especially startups) do not, and that companies using it often make exceptions. I would like to make the case that any company can (and should) use this approach and that you should never make exceptions!

Before describing the methodology, I’ll introduce you to a game.

Welcome to Mao

My daughter once taught me a card game called Mao. It was a nightmare to play since the rules are not explained to the players before they start playing. You discover the rules while playing but only as you incur penalties. It is really stressful. Especially when, just after you think you have discovered the rules, they change.

Work shouldn’t be like playing Mao. Life has enough unpredictable twists and turns; your workplace should not be one of them. Our time at work is much easier when the rules are laid out in advance and everyone understands how they work. This applies to compensation too.

A simple 4-step framework for transparent compensation

Transparent compensation frameworks take all of the stress out of one of the most important aspects of work. Here is a basic example:

1. Research
2. Structure
3. Communicate
4. Iterate

1) Research and benchmark

Research compensation for each role and decide what you think is fair to pay for each role.

The method that most companies use to do this is actually pretty good i.e. get some industry data and then decide where you want to position yourself for the various aspects of pay (salary, bonus, options, benefits, car etc.) relative to industry standards.

There are a number of possible approaches to this, some examples being:

1. Pay top-of-market cash compensation for the best people (see the famous Netflix Culture presentation for a description) with a mix of cash and equity / options (many companies let you choose how to allocate between the two).
2. Offer mid-to-low cash offers and large equity compensation, this is common for startups that are very cash constrained but would still like to hire the best talent to help them with a challenging and rewarding mission. For this to work, new hires must believe in the company so that they value the options and the potential upside they can deliver if the company is successful.
3. Offer low compensation combined with excellent other work conditions. These include flexibility, a mission to improve society or other benefits.

All of these can work but each business needs to pick a method and then carefully research, document and use it within the context of how it generally does business.

2) Structure

Once you have done your research, build a structured set of compensation principles that includes general principles and role-specific principles.

General principles: Build out a summary you can share, outlining how you think about compensation and what rules you have set. Examples include:

• What benchmark data you are using
• How the organization is being positioned relative to the benchmarks
• How we think about the different aspects of compensation i.e. salary, bonuses, equity and other benefits.

Role-specific principles: Lay out the details of the different roles in your business. For each outline:

• Role
• Required skills / capabilities
• Responsibilities
• OKRs (or other goals and metrics framework) defining what the role is expected to deliver mapped to company OKRs and Mission (see here for more on this)
• Compensation

Building this in an organized way ensures that everyone can understand what the role is, how it contributes to the success of the organization, what is required to succeed in the role and what the role pays. It also provides a map for everyone, letting them know what they need to do in order to gain a higher paying role or different role with more/different responsibility.

3) Communicate

Communicate this framework. No need to keep it a secret if everyone is paid based on the same compensation framework. It’s actually quite simple to communicate once it is written up.

If (or when) the framework is challenged by a team member there is an opportunity for a clear and open discussion about what is bothering them. You can then either articulate why it is structured like it is, adjust the framework if there are problems with it and/or change the way it is communicated to prevent future misunderstandings.

4) Iterate

What happens if you discover new information that suggests your research is no longer accurate and therefore the basis for your structure is incorrect? An example might be that outside candidates reject a job because your pay structure is below the level you are positioning yourself in the market.

The Pact

We can think of this approach to compensation as a way to implement the pact we make with our employees when we ask them to join our team.?

Here are two different versions of this pact:

Version A: “We have a job to be done and if you want to join our company to do that job, I will try to convince you to join for whatever is the least amount you will agree to be paid. You can feel free to try to get the maximum from me. Let’s see who does better and then let’s start working. Expect to negotiate for future pay raises as well.”

Version B: “We have a challenging but fun job for you to do that pays $X. We won’t pay more for that job if you ask and we won’t pay less if you don’t know to ask for X. We will pay X and this is why. If it turns out X is too low e.g. market salaries change to $Y, we will pay you $Y to bring you in line with the market.”

There is nothing better than inviting a team member to a meeting to let them know that we are increasing their compensation since we have found out that our old benchmarks under-pay them for their role. This is a great meeting, culture reinforcing and results in team members feeling that they are being looked after. They can feel free to focus on doing really well in their role, safe in the knowledge that their compensation will always be fair.

No more Mao

Using a framework like this can change compensation discussions from a game of Mao to simple, structured and effective communication.

Conversely, when we fail to do this, we can assume that this issue won’t be forgotten, even if it is not often mentioned. I have seen numerous examples of compensation issues resurfacing in frequent and unexpected situations, as team members try to figure out the rules for making their pay ‘fair’. It is also regularly cited in exit interviews, long after the manager thought it was a settled issue or hoped the employee had forgotten about it. Ultimately it might even be why someone leaves a job they otherwise love.

BUT don’t negotiate!

This brings us to the crux of this post. What I recommend you never do is negotiate compensation or make exceptions to a structured policy. That doesn’t mean stubbornly sticking to an outdated or incorrect compensation framework. But when you make changes based on new information or a change in your policies, make the changes for EVERYONE.

Why shouldn’t I negotiate?

Negotiating compensation can result in situations that are not fair, and in my experience can cause a number of culture damaging problems in your business:

a) Some people get paid more based on how well they negotiate and not based on the job they perform and how well they do it. How many team members would think that was fair once they know about it?

b) Compensation becomes an issue. Everyone either a) engages in conflict in order to try and get better compensation or b) doesn’t and knows their compensation is not as good as it would be. Conflict is pretty low on the list of reasons why people enjoy coming to work.

c) Even those who negotiate higher comp don’t know if they have the best deal possible. They only know what they achieved, not what they could have achieved. So bizarrely those who are the highest paid in your organization may not be happy with their compensation either.

d) Since getting paid is pretty high up on most people’s list of the reasons why they go to work, compensation concerns are not something that you can expect them to forget about. As a result, if people are unhappy with their compensation it ends up taking up a lot of everyone’s time to deal with this. We should have better uses for that time.

Why would anyone want this grab bag of nasty issues in their company?

Almost everyone will prefer this structured approach

If you can implement the 4-step approach outlined above, it becomes really easy to function in that kind of work environment:

• No need to fight to keep salaries confidential — they are all aligned.
• No need to negotiate with candidates — there is nothing to negotiate.
• No unfair situations — everyone is fairly compensated.
• Career progression is earned and built in, getting paid more = taking on a role with more responsibility and / or with higher results expectations i.e. full transparency on how to progress.

When I (or the companies I work with) have implemented this type of framework, it has dramatically reduced the amount of time that we as managers, and HR, needed to spend discussing compensation. It also took a lot of stress out of some situations that would otherwise have been very difficult. This includes the time when a list containing a number of team members’ salaries was left in a public space and someone read it. There was no drama as there were no nasty surprises.

OK, but what about the real world?

So let's get practical. What should one do in a situation where you have an amazing candidate who won't join unless they are paid more than the amount you are currently paying for that role. They say they are already getting paid / have an offer for more and won't come for what you are offering.

Let's look at 3 possible situations:

• Scenario 1: They are super talented and can deliver more/better results than the job description we have for the role. Solution 1: We can redefine the position and decide what we would pay for someone who can deliver that much more. Based on this let's see if we can match what they want or not. In the future we can pay other team members the same if they can achieve that level of delivery.
• Scenario 2: They are very experienced and can take on additional responsibilities than those defined in the job description we have for the role. Solution 2: We can redefine the position and decide what we would pay for someone who can take on additional responsibilities. Based on this let's see if we can match what they want or not. In the future we can pay other team members this much as well if they take on these responsibilities.
• Scenario 3: We expect the potential new team member to take on a similar level of responsibility and delivery to our existing team members. Solution 3: We recheck industry benchmarks to make sure that they have not changed since we set our compensation policy. If the benchmarks have changed we change them for everyone - lots of happy people. If they have not (and we don't want to adjust our policy up for everyone) we let the candidate know that that we are unable to match what he is currently being paid and we look for a new candidate. Tough as this may be.

Over the years I have done all 3 of these.

Some expectation setting

It takes time to create and implement a solid compensation framework. Not because the basic framework will be complicated (it shouldn’t be…). Rather, because there are always nuances to be dealt with such as:

• What level do we pay relative to benchmarks?
• How many levels for each role?
• What does it take to move between them i.e. what qualifies someone for a higher paying role?
• What about the team member we 'know' is more valuable but we can't quite articulate why?
• What role should we be hiring someone for? What if we want them for a junior role and they want a more senior role?
• Do we pay more for people with more experience even if experience does not equal better results?
• How do we give our more experienced people more responsibilities so we can justify paying more?
• How do we get away from career ladders and move more towards the Jungle Gym structure so we have more ways to offer career progression than seniority and compensation?
• What other benefits do we give?

If we take the time to think through these issues, our compensation framework can get more nuanced and customized to our business. As a result, it becomes easier to implement and becomes a valuable part of the infrastructure of our business.

Wishing you many happy years of not negotiating compensation.