How we built our equal-pay system
A simple framework for honest, equitable compensation.
Earlier this year, I transitioned my company to an equal-pay policy. Among our seven software developers, everyone is compensated in an identical way, and those numbers and formulas are public to the whole team.
It almost goes without saying that equal pay and financial transparency are good things—they’re critical to closing the wage gap as well as building a strong, cooperative and dedicated team. Nonetheless, many companies (including those who talk-the-talk about equity and inclusion) have large, irrational pay disparities among workers who do very similar jobs.
As my company has grown, I’ve had the opportunity to hire new people and build systems that will help us all prosper. My philosophy has been to design a business that I would be happy to be a part of — regardless of my role or position in the hierarchy. It’s easy to make policies that benefit the CEO — but could I build a company where I would feel I was treated fairly at the entry-level, mid-level and executive level? In short: Would I want to work at my own company? It’s a pretty high bar, especially coming from someone who eschewed traditional employment for entrepreneurship early in his career.
One of the key steps toward that goal is building a system of equal, predictable pay. I don’t want to work for a company that keeps compensation in the shadows, and I don’t want to put my team in that position either.
In today’s article, my goal is not to present our system as perfect — in fact, I’ll call out some of the flaws and areas where I need to make future improvements. I’ll also dig into other important elements of our compensation system — such as our revenue-sharing program — in future articles, so this article is about one part of our system, not the whole. For now, I hope this can act as a simple framework for other business owners, employees and contractors to introduce equal pay and greater transparency at other companies. I also hope it will prove that anyone can implement a similar policy with relative ease.
Before Equal Pay
Prior to updating everyone’s compensation to fit our new equal-pay structure (which I’ll talk about in detail in a minute), I had been working within a mental framework of what team members “should” be paid. I’d interview a new team member and ask them to quote an hourly rate (since everyone had experience freelancing, this was a typical request, and they’d often offer up a rate even before I asked). If that rate was within the range I had in my head, I’d usually say yes, and we’d start a trial project together.
‘I don’t want to work for a company that keeps compensation in the shadows.’
The problem, of course, was that the range in my head was pretty broad — the top number was roughly 40% more than the bottom number. As a result, people’s compensation varied significantly depending on the somewhat arbitrary number they asked for in our first interview. For some team members, they didn’t even get to choose that first “anchor” number, because I hired them through third-party services (which set their rates with minimal input from them) prior to transitioning them to working directly for my company.
The corollary for traditional employees is the request for your previous salary on a new job application. It’s simply an effort to anchor you to a particular number, so the company can offer you slightly more but not too much more. That anchor will dramatically affect your lifetime earnings at a company without a clear, simple, transparent equal-pay system, since all future compensation increases will be relative to your starting salary.
This started out haphazardly and without much thought, but once I got to a point where I’d hired seven people to do similar work, I knew I needed to change gears. I wanted to show everyone the numbers so they could see which projects were more or less profitable for us, but doing so would require me to show costs for each team member, and there was no satisfying explanation for why one person made 10% more or less than another. (The only answer was, “that was the random starting point,” and I would not want to work for a company that considered that an acceptable answer.)
Making The Transition
In order to comfortably shift to equal pay, I made two decisions without announcing anything publicly. First, everyone who’d worked with the company for a certain amount of time would be considered a “senior” developer, and would be paid at the same rate as the person in this group who had the highest pay at that moment. This resulted in 10% to 20% raises for a bunch of team members to bring them to parity with the highest-paid person in their group (who, again, was only the highest-paid person because he’d started with a higher anchor). They were all doing essentially the same work, so it made sense for them all to be paid equally and considered a single, egalitarian team.
I made this change privately with each person in the form of an unsolicited raise. Compensation had been “opaque” until then, so I didn’t make any grand announcements, I just silently updated everyone’s pay at the personal level so they’d be in parity.
‘What worked for my first few hires clearly wouldn’t scale.’
For new and recent hires, I then established the “starting” rate, which would be my offer for all new hires in the future. There were already a couple people at this starting rate, so it was a natural fit, and no changes were necessary for them. The only thing that would change in the future is that I wouldn’t start people at higher rates just because they asked for a higher anchor point; I’d provide them with details on our equal-pay structure and they’d have the choice to accept the role or not. (For more on my hiring process and why we do trial projects instead of parsing through resumés or aptitude tests, check out my detailed hiring guide.)
In practice, nothing changed, except that a few people were moved up to parity with their peers. The “bottom” of the range I’d had in my head became the starting rate, and the “top” of that range became the senior rate.
Because I knew the senior team members were already profitable at the higher end of the range, it was no sweat to make the transition — it was really just a matter of swallowing my pride a little bit, accepting that what had worked for the first couple of hires would not scale, and establishing a clear, simple system for the future.
Creating a Transparent Career Path
When I was in college, I had a strong desire to obtain a degree but a much stronger desire to do so in the fastest and cheapest way possible. I didn’t particularly enjoy academics, I enjoyed the idea of saving myself and my family some money, and I really liked the idea of saving myself a ton of time.
Fortunately, my university published a transparent, objective guide to what I needed to do to graduate. It wasn’t exactly simple, but it was the kind of thing you could spend 5 or 10 hours digesting, and then you could write up a list of all the credits you needed to obtain to accomplish your goal. This transparent guide allowed me to map out my path to getting a four-year degree (with a dual major) in three years, including a bunch of credits earned at a steep discount from summer classes at my local community college.
Despite the university’s many problems (including with diversity and inclusion), I have to give it credit for publishing a clear, objective path to success. They publicly guaranteed that if you passed a certain set of classes, you’d be entitled to a degree. (Getting into the university in the first place is a different matter, and the lack of transparency in that process is one of the reasons that I don’t ask prospective team members if or where they went to college.) Many government entities have similar systems and rules, where there’s a relatively clear and objective set of things you need to do to accomplish a goal, and it’s really hard to stop you if you follow the steps correctly. There are access and equity issues in all of these examples, but it’s nice to know that there are at least some written, easily understandable rules.
‘You deserve a career path that is transparent, measurable, and applies equally to everyone.’
At the typical company, on the other hand, all of these rules are intentionally secret — or don’t exist at all.
Try asking a typical owner what it would take to go from entry-level to manager to executive at their company. Could they provide even a single, measurable metric to guide you on your way? Usually not — instead, it’s a mix of arbitrary amounts of time (5 years? 10? 30?) and highly subjective determinations by your superiors, like how you do on your “performance reviews” or whether you are “ready” for a promotion. These companies lack any transparent, quantifiable way of measuring where you are in your career, and thus almost all promotion and compensation decisions are subjective or arbitrary. In some cases, nothing matters except whether you are in the good graces of a key decision maker at the right moment in time.
Needless to say, I have no desire to work for a company that’s just making it up as they go along, or one that allows managers and executives to dole out rewards in an arbitrary way. You deserve a career path that is transparent, measurable, and applies equally to everyone, just as I had the opportunity to zoom through college based on a published, objective set of rules.
Relying on subjective standards also allows bias to seep into the system in ways that are obvious to everyone, but at the same time are very difficult to pin down and resolve. If I make a subjective “performance review” decision, can I be 100% sure that I wasn’t influenced by biases around gender, race, age, physical appearance, whether that person is a parent, or any other set of attributes that should be irrelevant to a compensation decision? The only honest answer to that question is “no.” And if I can’t be 100% sure about my own biases, I definitely can’t be sure about the biases of other future managers.
We counteract this by taking as much of the subjectivity as possible out of promotion decisions. In the case of my team, the only metric we use to determine when you are promoted from your starting rate to your senior rate is the number of hours you’ve billed since you started working with us. This works well for us because billed hours are a good proxy for both profitability and experience — once you reach that threshold, we know roughly how much profit the company has earned as a result of your work, and we’re also comfortable that we’ve had enough time to train you to become more efficient and thus equally productive at the higher rate. Other companies might combine time with other metrics — the key is that they have to be easily measurable and verifiable by anyone, without any subjectivity. Think of these measurements as “credits” each employee is earning to get to the next step in their journey, and ensure that everyone has a clear picture of exactly what they need to advance their careers.
The Flaws and Challenges
At my company, we currently have seven software developers who are part of the equal-pay system I have described above. We also have three team members who are the only person in their roles (account director, account specialist and technology director). I’ve set up the same starting-to-senior pay scale for those roles, but since they’re only occupied by one person right now, it’s not quite fair to call it an “equal-pay” structure yet. That said, I anticipate promoting more people into those roles as the company grows, and we’ll have a clear and transparent system in place when that happens.
‘Any time you improve something, you’re acknowledging you were doing something wrong.’
The current equal-pay system also does not account for promotions between roles — for example, from senior software developer (whose main responsibility is heads-down coding) to technology director (who’s responsible for more meetings with clients and management of developers). Because this has only happened once in my company’s history, I have yet to establish a transparent system for deciding when we need a new technology director (would we have to double in size? triple?) or how that person will be selected in a way that everyone agrees is transparent and fair. I have time before I need to solve that problem, but for larger companies it would become an issue much sooner, since there would be more promotion between the “maker” and “manager” levels.
The next challenge is really a psychological one: any time you improve something, you’re also subtly acknowledging that you were doing something wrong in the past. When we’re dealing with something as sensitive as compensation, this can be a bitter pill to swallow for business owners, and it certainly has the potential to raise some concerns among the team. That said, if you can do it in a way where it’s framed as “a bunch of people got a raise and we now have a clear system for the future,” my experience is that it’s only moderately awkward for the owner and universally positive for the team. The benefits I’ve seen — much higher levels of team camaraderie and the ability to speak openly about the company’s finances at any time — far outweigh the awkwardness of talking about money for the first time.
The one caveat I’ll add is that I still try to be very respectful and humble when talking about actual dollar amounts. Everyone has a different perspective on what “a lot of money” or “a great salary” means, and there will still be gradations of income within your company even if everybody in the same role gets paid the same amount. Your team members all live different lifestyles, have different family arrangements, and have different costs of living. Equal pay doesn’t automatically mean everyone can afford the same things. It’s just a fair starting point and an opportunity for you, as the owner, to do right by your team.
As with all business decisions that intersect with diversity, equity and inclusion, I’ll also encourage you to keep your announcements, celebrations and self-congratulation about your new equal-pay policies small and humble. Anyone can talk about equity, but very few people actually put their money where their mouth is, and even fewer do so without asking for any sort of praise or recognition in return. If you’re in a position of power to make hiring and compensation decisions, do so in a way that is entirely selfless. You and your company will benefit from a stronger and longer-lasting team, but you should not seek to be rewarded with praise, recognition, or induction into any sort of exclusive club, real or imagined. Be proud of yourself for your progress and the new type of company you’re building, but don’t pollute your success by seeking social recognition or approval from the people around you. If it comes naturally, that’s great! If not, you still know you’re making a difference.
What about ‘the market’ for ‘ambitious’ employees?
Before we wrap, I’ll address one more potential weakness in the equal-pay system. How do you handle team members who still think the old-fashioned way, where a cut-throat competition for higher compensation (equality be damned) is the most effective way to advance one’s career? In some companies this is explicitly stated, in others it’s an open secret. Either way, many people believe that the employee and company should be inherently adversarial, each party constantly jockeying to extract as much money as they can from the other. We imagine there to be a “market” for “the best” employees, even though it’s very difficult to describe how that market works or what qualifies someone as the best. (Spoiler alert: that’s because the concepts of both “the market” and “merit” are mostly fantasy.)
‘Equal pay encourages cooperation rather than cut-throat competition.’
So, how do you handle it when an employee wants to negotiate their way up and out of the equal-pay system? First, recognize that for the vast majority of roles, there is zero correlation between someone being a good salary negotiator and being a good member of your team. Don’t conflate someone being “assertive” or “on top of their game” in a salary negotiation with that person actually being your top performer day-to-day. Instead, I encourage you to value people who view you as a cooperative partner rather than an adversary. (You have to give them that same respect as a partner, too!) The establishment of an equal-pay system is a great way to encourage a cooperative-partnership relationship between you and your team. A cut-throat, every-man-for-himself compensation system does the exact opposite.
I encourage you to peg your equal-pay rates to the higher end of the compensation range for your location and industry, using one of the many salary-scale tools out there on the web. Once you’ve done this, you can be confident that you’re compensating people in a fair, transparent, and justifiable way, and that your rates are informed at least to some degree by what “the market” — that is, other people — is doing. The vast majority of your team will be thrilled that they’re earning a great income and that they never have to worry about an adversarial financial relationship with their employer again. As your company grows and prospers, there will be room for you to universally raise everyone’s income, provide revenue-sharing bonuses (I’ll share our system for this in a future post), expand your management team to allow for promotions, and reward everyone in transparent and equitable ways.
That said, it’s certainly possible that an equal-pay policy will turn off potential team members who still look at the world as a cut-throat competition and don’t appreciate your shift to a more cooperative environment. In other words, an equal-pay system leaves some people out!
This is a tough situation, but my current position is that I’m OK with a system that constrains the most aggressive and competitive people while providing a much better life and career for everyone else. There may be some businesses where aggression is the key to success, but I have no interest in owning or working for that type of company. Instead, the equal-pay system attracts team members who want to make an investment in a high quality of life with a guarantee of fair, transparent and generous compensation that allows them to build a thriving career.
My team and I like having fun at work. We like being able to “turn off” at the end of the day. We like having a clear path to financial prosperity. We like that everyone around us is treated exactly the same way. We like building positive, cooperative relationships with our co-workers and clients that last a lifetime.
With equal and transparent compensation, we’ve taken a small step toward accomplishing all of those goals.
Rob Howard is the founder and CEO of Howard Development & Consulting, the web development firm that creative agencies trust when every pixel matters. His startups have been featured in Entertainment Weekly and Newsweek, and his clients have included The World Bank, Harvard and MIT.
Originally published at https://howarddc.com on December 27, 2020.
