When humans want other humans to change their behavior, our first thought is often to offer monetary incentives. To get our kids to do their chores, we offer an allowance. To convince someone to try a new product, we offer a coupon. To get employees to work harder, we give them a raise. But in all of these cases the opposite can happen. Kids won’t work without the allowance, coupon cutters won’t buy unless it’s on sale, and employees wonder if they should have asked for more. At a time when expectations seem all over the map, it’s worth taking a step back and realizing that salary isn’t much of a motivator but can be a massive demotivator.
The research on this is pretty clear. This Harvard Business Review report on a meta-study of 120 years of research shows that “the association between salary and job satisfaction is very weak.” On the other hand, a focus on monetary motivation can weaken intrinsic motivation. Intrinsic motivation is our built-in desire to do work we’re proud of, which costs a company nothing. And “Intrinsic motivation is also a stronger predictor of job performance than extrinsic motivation.”
But I don’t have to quote research studies—you already know this based on your own experience. Think about the last time you got a raise, probably around an annual review. Did it feel like a reward for your hard work—or that your employer was catching up to your actual value and the market rate? Now think about when you learned that a peer was at a higher salary while doing the same (or worse) work. That feeling sucks and sticks—and hits on the right way to think about salaries…
Fairness is What Counts
Human beings have programming that makes us much more sensitive to negative input than positive input. That helped us avoid everything from dangerous animals to social faux pas. So the good feelings from a salary pale compared to the negative feelings of learning that you’re not getting fair compensation for your work.
Did that new hire get a higher salary than mine?
Are men negotiating better than women?
My friend’s company did mid-year raises, why aren’t we doing that?
These questions and many more are currently bouncing around the brains of the people in your company. Feelings of unfairness eat away at us like a virus, negatively impacting our work and collaboration with others. We shut down, dial it in, quietly quit and poison others against the company.
Today there are many more ways to compare your salary than ever before. Glassdoor and others calculate our market rates and alert us when they rise. The new generation of employees regularly shares and compares their compensation packages, a habit that was grounds for immediate termination back when I started working. This study suggests that even the people making more are demotivated when salaries differ.
And with the rise of remote opportunities, your company is competing with many new competitors who are willing to pay much more. Salary numbers are brutally viral—we hear that “Facebook is paying $200k” and suddenly, employees feel underpaid and expect their employers to match it.
Treat Salary Like Plutonium
Salary does have lots of power to attract and retain talent in your organization. But because it can easily trigger negative feelings of unfairness, you’ve got to treat it like another source of great power: Plutonium. We need nuclear reactors, but we must have a process to handle the fissile material safely. Similarly, you’ve got to have a clear, careful process for handling salaries.
The starting point is to assume the worst will happen. If you suggest someone might get a 5% raise next year, you’d better believe they’ll remember it. If you hire someone at a higher rate than current employees doing the same job, they will find out. If you give someone a raise to try and keep them from quitting, expect a line of their peers to do the same.
The key to handling salary—like so much of business—is to have a process. Process is not bureaucracy; rather, it is a “way we do stuff” that’s established with thoughtfulness and followed consistently yet open to evolution. Process allows you to think and worry less and establishes fairness that reduces the vast majority of demotivation risk.
Build Your Salary Process
Any process is better than none, but there are a few ways to build better. First, you’ve got to start with a Salary Strategy. This should ladder down from your overall company strategy and be related to what your company does, its competitive differentiators, and the kinds of people you need to grow profitably.
Years back, at my digital agency, our strategy was to attract, develop and retain talent by creating a great place to work. We knew that we couldn’t profitably compete with other agencies by paying the most, so we created a culture that people loved and flourished in. At our social/influencer company, we strategically decided to hire a lot of people with less than two years of experience as a way to reduce total salary expenses, take a risk on talent, and train them up our way (vs. dealing with other companies’ baggage).
Once you’ve got a strategic approach, it’s time to make decisions on the common issues that will come up, including:
How are new hire offers calculated?
Do we negotiate?
Do we match competitors’ offers?
How are raises set each year?
When are raises set? Do we ever look at special circumstances?
What if hire someone who’s getting paid more than current employees in the same role?
What does a manager do when an employee asks for a raise?
Once you’ve got a process, your job is to make it as open and transparent as possible. Write up a document with the process and why you chose it, then share it with job applicants and each employee—every year. Every manager needs to know it and be ready to handle the questions that will arise.
Changes can and should be made based on market needs, employee feedback, and business changes. But these changes, too, must be handled with extreme care. Get lots of input from staff at every level, and over-communicate the rationale for and expected output of any change.
Consider Innovations
What’s really fun about the game of business is trying new things. And thanks to thousands of companies openly innovating, there’s never been a wider range of ideas to investigate around handling salaries. Startups in particular, have a lot of opportunities here since they are not beholden to years of history and thousands of employees. Unique ways to approach salary can also be a way to differentiate from competitors and pick off killer talent. Here are some of the more interesting experiments that I’ve seen:
Geographic consistency - Remote work has thrown the rulebook out the window, but most companies still believe in paying local market rates. A growing number of companies offer the same salary no matter where you live. Often that means the middle-of-the-pack rate in a big city like San Francisco but a top-of-market level in Columbus, Ohio. This not only attracts talent from smaller markets, but it adds a level of fairness across the company. After all, why should someone choosing to live in a big city deserve to get more money for the same work?
Everyone makes the same salary - One of our Hearty clients pays the same salary as everyone on the tech team. The CTO, engineering managers, and individual contributor developers all make $145k per year—no matter where they live. It’s wild to get used to, but it’s working.
Meaningful profit sharing - While a salary might not be very motivating, a success-based bonus or profit sharing can be a great way to get a team to boost their game. At my agency, we offered company-wide bonuses based on hitting our annual profit goals. The brewery Brew Dog shares 50% of bar profits with the staff. In these cases it’s like everyone has skin in the game of company success.
Allow choices - Do you want a 4-day work week? More health coverage? A higher equity stake? We’ll take all the benefits we can get, but we can’t offer everything in this Tweet. As any Starbucks barista will confirm, people love to personalize their experiences—both to improve their enjoyment and get the feeling of self-direction. So allow employees to make trade-offs by taking more or less salary in exchange for other benefits. The side bonus of this idea is that it becomes harder to compare salaries among staff directly—or against competitors’ offers in the market. After all, each person’s package is unique and geared to their personal cost/benefit analysis.
At the end of the day, no matter how strategic, consistent and fair your salary approach is, some people aren’t going to love it. And that’s OK, too. People will self-select in or out to the workplaces that fit best for them. You can’t win everyone over, but if you can just focus on not pissing your current employees off, you’ll save yourself—and them—enormous stress and pain.
Bob Gilbreath is a 2x-exit entrepreneur and co-founder of Hearty, a curated matchmaking service that combines top software developers with early-stage, venture-backed startups.