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Why Making Salaries Public Is Easier Said Than Done

The recent firing of New York Times executive editor Jill Abramson provides a timely cue to assess the pros--and cons--of being transparent about compensation.
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At most organizations, leaders speak of "transparency" the way politicians speak of "jobs" and "family." It's a safe word no one will object to. You may as well milk it when you're speaking publicly. 

Yet most organizations are far from transparent when it comes to employee salaries. And that topic has been in the news lately, after the well-publicized sacking of Jill Abramson as editor of the New York Times. As with every firing in the history of firing, only the insiders know the real scoop. But as Felix Salmon points out on Vox, "she was fired not long after she started asking questions about the amount that she had been paid, over the course of her career in NYT senior management, compared to the amount that her male predecessor was paid."

Salmon goes on to make a case for making pay rates public. Of course, here at Inc., where the concept of open-book management was first promulgated back in the 1980s, there's a ton of material on the merits of making all numbers (not just salaries) transparent. Jack Stack and Bo Burlingham have written about it extensively. 

Here's the problem: In everyone's race to venerate transparency, it's easy to forget that actually implementing an open-book system is difficult.

The Challenges of Open-Book Management

You can find a great example of those difficulties in the dot-com era story of Internet consulting company, Adjacency. Back in 1998, CEO Andrew Sather and his partner, Chris DeVore, director of business development, started meeting weekly with their 25 employees to discuss the details of the San Francisco-based company's operations, including cash flow and potential customers. While employees appreciated the honesty, here's what happened:

  • Employees got frightened. They didn't like hearing about Adjacency's close calls with missing payroll. Sather admitted that the reports sometimes "scared" the employees. 
  • Secrets were leaked. In one meeting, they told employees about a potential deal with a new client. One worker bragged to a friend at a competing company. The friend told his bosses. Adjacent almost lost the client. And the client was furious. 

When it comes to being transparent about salaries, there are comparable risks. Competitors, knowing what you pay, can outbid you for talent. Employees, knowing their colleagues' salaries, can become unduly emotional (bitter, nervous, jealous, resentful) about what they perceive as the injustices of their own pay. They also might feel that their own secrets are being betrayed--after all, not every employee wants her salary to be a matter of public record. 

The Case of Whole Foods

John Mackey, cofounder of Whole Foods, has famoulsy advocated for making compensation transparent. Moreover, he says he's never lost an executive because of the company's compensation policy which, in addition to transparency, caps executive pay at 19 times the pay of the average store worker. 

Here's the thing. In 2007, Whole Foods raised the executive compensation cap from 14 times the average pay to its current 19 times. The reason, Mackey stated in a letter to all employees, was "to make the compensation to our executives more competitive in the marketplace." In addition, Mackey told Inc. last year that raising the cap might happen again in the future, if Whole Foods again needs to remain competitive for executive talent. 

The point here is not to pick on Whole Foods. After all, when it comes to salaries, the company is backing up its "transparency" talk. In fact, as Alison Griswold reports in Business Insider, any employee can look up another's salary, all the way up to the CEO level. That's to be commended.

But what can't be ignored is that the company faces a different executive recruiting-retention challenge than that of its close-to-the-vest rivals. It must keep the 19-to-1 ratio in mind. And if it needs to increase the ratio, it needs to manage how employees and other shareholders will react to that change.

Tips for Making Salaries Transparent

If you still believe that the quest for salary transparency (or overall open-book transparency) is worthwhile, there are two pointers you should keep in mind. 

1. You can use ranges, rather than exact figures. Samuel Bacharach, the McKelvey-Grant professor of organizational behavior at Cornell University's ILR School, has often made the case to "say what you pay" to employees. Citing research by academics at Tel Aviv University, he notes that "under conditions of pay secrecy, employees felt that they were not being treated fairly and therefore that greater effort wasn't worth it. The demotivating effect was especially strong among talented workers." 

The same research suggests that you don't have to reveal all of the numbers. Instead, you can provide ranges or medians. Employees above the median will be pleased. Employees below it will seek explanations. That's when you, as a leader, need to step up (the way Whole Foods has) to explain not only your views of compensation, but also what individual employees can do to earn more--if that's what's driving them. "Remember what matters to your employees isn't that their pay be equal but that the system for awarding it seems fair," he writes. 

2. You should remain open to comments and criticism from outsiders. Buffer, a four-year-old private company based in San Francisco, publishes its finances every month. Beyond company financials, the company is also transparent about salaries and equity positions. Here's a sampling: 

Joel (CEO)= $158,800 (75k Executive Officer base + 20%, + 12k/$m revenue, 1.2X, +22k,)
Leo (COO) = $146,800 (70k Operations Officer base + 20%, + 10k/$m revenue, 1.2X, +22k)
Sunil (CTO)= $137,600 (engineer + 20% + 8k/$m revenue, 1.2X, +22K, +10K)
Carolyn (CHO) = $106,000 (happiness +20% +8k/$m revenue, 1.2X, +22K)
Andy (Senior iOS Engineer) = $107,900 ($60,000 + 5% + 2*$3k, X 1.1 + 22K + 10K)
Michelle (Growth Engineer) = $98,000 (engineer, 1.1X, +22K, +10K)
Åsa (Senior Happiness Hero) = $85,900 ($45,000 + 5% + 2*$3k, X 1.2 + 22K)

In response its posting of these figures (which happened back in December), Buffer faced its fair share of second guessers. The 338 comments on the posting included morsels like: 

  • Your C brass should be paid less than your engineering squad.
  • I do question your judgement about revealing real names and their salaries.
  • The danger with this public--on the web--is if any of those individuals move on, they lost leverage in future salary negotiation.

Likewise, in its monthly financial reports, Buffer is always fielding comments from outsiders, questioning the numbers or seeking clarifications. The team responds to all of the feedback, welcoming much of at as positive suggestions. For example, in response to the most recent financial report, an anonymous user posted: 

I would be keen to see what customers look like...in terms of size/scope. Profiling their size may give you an idea (along with average/range of their respective connected account #'s) of where a given customer's conversion pivot points are against price points.

Ex1. A small coffee shop might not see the value in moving up to $50/mo to get to 15 connected accounts
Ex2. A larger movie studio biz would have no issue with it.

To which cofounder Leo Widrich replied: "Hey there, that's an awesome idea!...Will be fun to implement some of these learnings and adjust our plans then, thanks so much for chiming in, I think that's the right track for us to go down!"

You can see, then, that Buffer is actively taking steps to handle the communications burden that comes with transparency. In addition to handling any in-house ramifications of revealing numbers, Buffer is keeping an eye on how outsiders respond. 

In other words, the work of being transparent (about salaries or anything else) doesn't stop when you open the books. That's where the heavy lifting--the communicating, the explaining, the managing of feelings, the recruiting and retaining--begins. 

IMAGE: Getty Images
Last updated: May 16, 2014




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