Compensation: Transparent/Open systems

Twitter Summary:  Open compensation systems seem ultimately fair, so why do closed compensation systems still dominate?

Compensating engineers and managers in most organizations is a haphazard affair. Most organizations have “pay ranges” where they are provided a window of salary that each employee should be for stock, cash, bonuses, and even the amount of office space allocated for each employee level. If compensation ever felt “unfair”, it was more often caused by the secrecy surrounding the compensation process then any actual structural unfairness in the system. Most software engineers were in a few thousand dollars of each other, and by the time we are talking about 6 figure salaries,  “fair” was really just worrying about pride or status. However, it is hard to make people feel they have gotten a fair offer if the whole system is clothed in secrecy and they don’t feel that their compensation reflects the projects they have completed.

One solution is to have a transparent compensation process that can be inspected by the team and they can help contribute to its ultimate success. It is possible to run the largest of organizations with an open/transparent compensation system as the military and the U.S. government have published all their pay levels and expected benefits. Why don’t more companies open up their compensation for their employees to help contribute?  In my search for open and team based compensation systems my favorite example has been Joel Spolsky’s Fog Creek Software Compensation System. I was lead to his plan by the compelling article “Why I never let employees negotiate a raise”.  The summary is that if there is an issue that requires a raise for one employee, the company should consider if every employee at that pay level should get a raise. Frequently, the issue of a raise is simply the engineer is having some issues with some other aspect of their job. By having an open compensation system, the engineer can understand what it would take to increase their compensation individually, or by making the company more successful such that the profit sharing mechanism benefits them and all their colleagues.

Closed compenstation systems have difficulty getting it right for team based development methodologies such as Agile development. Agile software development practices require a different way to think about how to align team goals with the incentive to launch goals. Mary Poppendieck’s article on Managing People and Projects(PDF) is a great example of what a manager can do if they are trying to help create an appropriate reward structure for a team within a closed compensation system organization. The compelling part, is that if you follow her guidelines it will eventually lead you to a transparent/open compensation system as advocated by Joel Spolsky.

There are ultimately some holes in these compensation systems as they don’t take into account organizations that have roles that have been traditionally incentive based. An example of this is a sales force, that is provided a bonus if they sell a certain amount of the company’s product, however as a whole these seem like a great way to think about creating a company’s compensation plan.

One thought on “Compensation: Transparent/Open systems”

  1. My company, Galois, adopted an open, results-based, compensation system last year. The transition from the previous closed system to the new one was a bit painful/awkward, but now that we’re used to it, people seem comfortable with it.

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