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Chapter 13 - Pay fairly

Use a salary formula to calculate fair wages and forget individual money negotiations.

People work to earn money but are not motivated by it.

Yes, I like money as much as the next person, but study after study has shown that people are happy if money is not the main reason they do their work. Of course, if you’re poor and you’re struggling to make ends meet, you mainly work for money. But as Maslow’s pyramid of needs1 shows, once people’s basic needs are met, they automatically prioritize other things about their work, such as relationships, prestige, sense of accomplishment and achieving their own potential.

Money is the basic need, and it should be treated as such

I get confused when I see businesses making money seem like more than what it is – simply, it’s just a basic need. With complicated bonuses schemes, performance metrics and other elaborate carrot and stick systems, they think they can trick people into working more by motivating them with money.

The problem with such an approach is that once the monetary goal is reached, people lose interest in the work that got them there. When it was all about the money, who cares about the quality of work – it’s all about getting that bonus, no matter the cost!

You want people excited about work, not about the money they get from it.

Let’s take the money talk off the table

Talking about money is not fun – especially when you have to negotiate it. The person who pays wants to pay the least amount possible, and the payee wants to get as much as they can. These are conflicting motivations, and very often the outcome doesn’t make anyone truly happy.

A few years ago, inspired by other companies2, I decided to change that and we introduced a salary formula – a predictable formula for calculating salaries for everyone on the team.

The salary formula – a fair way to compensate for work

Why use a formula to calculate salaries?

  1. To be fair to all team members – A formula like this eliminates individual negotiations and big disparities of salaries between team members, which plagues many companies. The formula ensures that everyone is compensated fairly compared to other team members who are doing a similar job.
  2. To make sure the salaries are rising every year – Whatever happens, the components of the formula make sure that the salary raises automatically every year. A person’s salary will never be lower than it is today.
  3. To make salaries predictable for everyone – For each team member, this creates a sense of security – they know exactly what they’re earning now and how it’s calculated, and they can estimate how it will go up next year. For the company, it’s easier to predict cash-flow and budget estimates so that we remain healthy and profitable.

What follows is implementation. It’s not a universal formula, and many companies approach it differently. This is our method, and in a few years, it will likely be reviewed and revised. If you’re a business owner or a manager in a company, hopefully this serves as inspiration for you and provides a good starting point for your kind of formula.

The components of Nozbe’s salary formula

The salary formula consists of these components:

1. Base salary – the main component

Base salary is the current market-value salary for each employee category. It’s revised every year based on the market conditions and our company’s revenue. It either stays the same or it increases.

The goal of the team is to work together with an aim to raise the base as our revenue increases. This way, everyone gets a fair increase in salary at the same time.

Rising the base salary is the main goal we work towards – to make sure our business is healthier so that we can enjoy higher salaries next year.

There are different employee categories in our team:

CXO -–C-executives – we currently have a CEO and a CTO – VP – VP (Vice Presidents) – e.g., VP Support, VP Finance, VP Marketing, VP Product… – Dev – Engineering team – Marketing – Marketing team – Support – Support team

Everyone from the same category has the same base salary.

2. Time with the company (weight, in years: two points)

We appreciate loyalty, so the longer you work with Nozbe, the higher your salary gets. This is revised every year in January and automatically causes a raise in the overall salary.

Many companies, as well as the European Union institutions, use this as the main metric for calculating salaries, but I don’t like it. I appreciate people being with the team for a long time, but I don’t think that just by being here first, you should earn more than someone who just joined the team, as they may have vast experience and expertise gained elsewhere.

3. Level of proficiency (weight: 10 points)

This component considers the level of your professional development as assessed in the moment you’re hired. Every team member has a chance to increase this level by learning new skills or improving their current ones, as agreed with their supervisor.

Your level is a secondary goal, as it is more of a personal goal than a professional one. It’s OK to stay on the same level as long as you’re doing a great job, because your main focus should be to “raise the base” for everyone in your category.

In our salary formula, we stick to this rule: Team first. You second.

4. Tags (weight: 5 points)

Tags are additional responsibilities a person has in the team. They are something extra that doesn’t directly reside in a job description.

For example, someone on the Customer Support team that is also responsible for some marketing tasks can get a Marketing tag. A front-end developer who’s responsible for the Android platform can get a Platform tag. Our head of content, Magda, who’s the editor of this book, also coordinates our company-wide practices like hiring, so she gets a Coordination tag.

Important caveat: VP- and CXO-level employees in my company who form the “Directors” team don’t get any tags. This wouldn’t make any sense. All of the directors in my company do many things and wear many of hats, so we could literally give ourselves all of the tags.

The salary formula calculated

First, we calculate all parameters against their weight, so we add time with the company, personal level and then tags:

Extras = (weight of time x time) + (weight of level x level) + (weight of tags x tags)

Once we have that, we increase the base salary by these extras:

Total Salary = Base salary for your category x (1 + (Extras / 100))

Example salary formula calculated

Here’s a simple calculation to make the point. Let’s say the base is 1000 EUR per month. (I know it’s low in many markets, but it’s the easiest way to show how it’s all calculated.)

Let’s assume the person has been on the team for two years, has a level of three and has one tag. Based on this, let’s calculate the extras to their salary:

Extras = 2 x 2 (time) + 3 x 10 (level) + 1 x 5 (tag) = 39

Now based on that, let’s calculate the wage:

Salary = 1000 EUR x 1.39 = 1390 EUR

Why teamwork influences the salary more than personal achievements

Let’s compare this salary to what happens when we raise the base salary by only 10%.

New Salary = 1100 EUR * 1.39 = 1529 EUR

That’s right: the entire salary goes up by 10%, so by 139 EUR!

However, if the person is focused only on their personal development and through hard work they manage to raise their level by one point, from three to four (which is by 33%!), but the base salary stays the same, here’s what happens:

Extras = 2 x 2 + 4 x 10 + 1 x 5 = 49

New Salary = 1000 EUR * 1.49 = 1490 EUR

So yes, they got a nice raise, but the team effort would have paid more.

The salary formula takes money off the table when hiring

When we hire, we can publish the expected wage for the position very easily. We just put it in the salary formula and vary it by one or two level points, and we have wage brackets done. This is what we can pay for the job. No more. No less.

This has made my job easier as the owner of the company:

– When one of my VPs is hiring for a position in their team, they don’t have to ask me: “How much should we pay for this position?” They just put it in our salary formula and they have an answer. – Salary negotiations are no longer a thing in the company. We can talk about the personal development level, but not about money. – I’m not the only one deciding on the shape and form of the salary formula; I do it with all of our Directors team. We review the system together and make sure it’s fair and square.

No gender or race bias!

I can’t fathom why this is still an issue in 2020. Personally, I have three daughters and I want them in the future to be compensated on the same level as their male peers. The salary formula doesn’t have a gender or race component – which, again, is how it should have always been.

Downsides of a salary formula…

While I believe such a salary system is worth introducing in all of the teams, it has its downsides:

– Because of how business works, some people like to negotiate their salaries or believe they’re worth more than anyone else. This system is not for them. They won’t feel it’s fair for them and they’ll leave the team or choose simply not to join it in the first place. – This system makes it virtually impossible to poach people from other companies, as you won’t have the leverage of a higher, individually-tailored salary for them. Unless, of course, they want to work with you because you’re following advice from this book and you’ve created an environment that people really want to be a part of. – Your competitors will have it easier to poach from you, because they’ll be able to individually outbid what you’re offering and, according to the salary formula, you have no chance of countering their offer.

While these are valid concerns, I still prefer to work in a team where compensation is not something we talk about too often and instead is governed by a fair salary formula. My only concern is to be able to generate enough revenue that I can raise the base every year for my team members and that they’re paid top dollar for their work while working in a #NoOffice team.

The one thing: Let a formula handle the money!

By paying people fair and square and by following a transparent salary formula, you can focus your team efforts on the job that needs to be done. People will stop wasting time wondering and doubting if they’re paid enough, if their peers are earning more or when they should meet their boss for a wage negotiation. A fair and transparent payment system makes for a better team spirit.

To learn more how people really are motivated, I recommend the book Drive by Daniel Pink3.

  1. Maslow’s hierarchy of needs on Wikipedia 

  2. It started with a presentation by a Polish software house El Passion; later, I checked how Buffer pays and also compared that to how the EU institutions pay. 

  3. Drive – The Surprising Truth About What Motivates Us 

Next: Chapter 14 - Be generous

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