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Why secret salaries are a bad idea



Why secret salaries are a bad idea

It’s a golden rule in most businesses that salaries must be kept secret. Except for a few heretics it is almost universally accepted that mayhem would ensue in the workplace if people knew what their co-workers, their managers or – gasp – the CEO was making.

Making salaries open inside a company instead seems like a wild idea sure, but it makes a lot of sense and brings advantages for both the workplace and for its people. Read on to see why.

The case against secret salaries

There are three major reasons why secret salaries are silly:

  1. It frustrates employees because any unfairness (real or perceived) can’t be addressed directly.
  2. They’re not secret anyway. People talk, you know.
  3. It perpetuates unfair salaries which is bad for people and for the organization

Let’s look at each of these.

If Johnson over in production is making 1.000 more a month than I am and the CEO is making 22 times what I’m making, then hopefully there’s a good reason for it – one that I as an employee am entitled to know and capable of understanding. So why are salaries treated as state secrets?

The main reason may precisely be that they’re not currently fair and therefore making them open seems dangerous to many workplaces. Maybe Johnson is making more than me, not because he does a better job, but because he drives a harder bargain when it comes time to negotiate salaries. Or sucks up to the boss. Or has some pictures from the last christmas office party showing the VP of marketing and an intern in… never mind. That doesn’t seem fair, does it? We can all agree, I think, that it makes much more sense to determine salaries based on people’s value to the company.

I have worked at two different companies where salaries were secret and guess what: They weren’t. Most people knew what most others were getting. In one company I consulted for, the IT department had even found the Excel spreadsheets HR kept the salaries in. They knew what everyone was getting.

And here’s the problem: If Johnson’s salary is (unfairly) higher than mine, and secret, I can’t complain to my manager about it because I can’t admit that I know about it. When a company sets up a situation where people can see the unfairness but can’t address it directly, or even discuss it openly, they’re rigging the system for maximum frustration.

Companies must attempt to pay their people as fairly as possible. You might think a company should try to pay people as little as possible, but companies who subscribe to that philosophy must be prepared to steadily lose all their good employees to competitors willing to pay people what they’re worth. A company must attempt to pay each employee a fair salary, ie. one that matches the employee’s skills, the market average and other employees inside the company. In other words, the company itself has a vested interest in keeping salaries fair, and keeping salaries secret makes that nearly impossible.

The case for open salaries

Making salaries public (inside the company of course) has some major advantages:

  1. Salaries will become more fair. The system gets a chance to adjust itself.
  2. It will be easier to retain the best employees because they’re more likely to feel they’re getting a fair salary.
  3. The pressure is on the people with the high salaries to earn their keep. Everybody has to pull their weight – the higher the salary, the larger the weight.

I believe on a very fundamental level that openness is better than secrecy, in life and in business. I’m not naïve enough to share all information all the time, but my chosen approach is “Let’s make everything open by default and only make those things secret that absolutely need to be”. Would I share my list of prospective clients with my competitors? Nah. Would I share it inside the company? Heck, yeah!

So when I co-founded an IT company back in 1997, we decided right from the beginning to make salaries open. We even had a page on the intranet where everybody could see what everybody else got. And yes, this did cause some discussions along the lines of “Hey, why am I getting less than Johnson, my work is at least as good at his”. We took those discussions seriously and we either clarified the difference in salary (eg. “Johnson gets more because his clients are consistently more satisfied than yours”) or we adjusted the salaries to match.

Semco is a Sao Paulo-based company of 3.000 people who’ve gone one step further: They allow employees to set their own salaries. No really, they do! This works only because all salaries are open. I could demand a high salary and get it but I’d better be showing results because people are sure to be watching those who make a lot of money. That’s a business experiment only for the truly daring enterprise, but Semco has demonstrated for the rest of us that it can work.

Ricardo Semler, the owner of Semco said this about the value of discussing salaries openly:

Salaries are a sensitive subject, but open communication is important enough that it should be tested, even if there is a price to pay. It’s at the very heart of a shared culture. If discussion of salaries is taboo, what else is off limits? The only source of power in an organization is information, and withholding, filtering, or retaining information only serves those who want to accumulate power through hoarding. Once an e-mail is not circulated, or if it is edited, then illegitimate pockets of power are created. Some people are privy to information that others don’t possess. Remove those pockets, and a company removes a source of dissatisfaction, bickering, and political feuding.
- Ricardo Semler in his excellent book The Seven-Day Weekend

You tell’em Ricardo. Making salaries open opens yet another pocket of information that the power-hungry would otherwise use to consolidate their positions – to the detriment of co-workers and the organization.

So come on: Make salaries public. Put them on the intranet. I dare you! Why keep them a secret?

There is one requirement for open salaries to work though: Employees must know what factors influence salaries. Are they based on customer satisfaction, hours worked, quality, sales figures, seniority, skills, commitment to the compay, education, etc… What matters when setting salaries and what doesn’t matter? If the company has not clearly stated this, comparisons are meaningless. It is of course management’s responsibility to know and to publicize the factors that determine employees’ salaries.

In our company we decided this together, and we agreed that the most important factors would be customer satisfaction and commitment to the company and that formal education and seniority didn’t matter. We put this in a document on the intranet as well. I can safely say, that making salaries open was one of the best things we did for our company and it almost made salary a non-issue – it was certainly nothing that caused us any frustration or troubles.

So try it: Make salaries open. I double-dare you.

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