Should organisations allow staff to decide their own salary?

Self-setting salaries could be a valuable strategy to attract talent. But is it a good idea or an administrative nightmare?
Illustration showing staff choosing their own pay

How much do you think you are worth? Most employees prefer not to answer that question. Or if they do, they inflate the figure in anticipation of it being brought down by managers. Yet some companies have handed over salary setting to their staff, allowing them to decide how much they should be paid. 

An air of mystery has always surrounded agreeing pay rates. With only senior management privy to the details of who gets paid what, it can be a source of distrust and dissatisfaction among staff. Empowering employees to decide their pay sounds radical but isn’t a new strategy. 

Employees at Brazilian company Semco were deciding their own pay in the 1980s, while Dutch software consultancy group Finext and the US tomato processing firm Morning Star have run this model for years. More recently, smaller tech firms and consultancies have experimented with it. With talent shortages impacting many business sectors, employers could consider it a way to attract and retain talent, as Richard Vickers, CEO of recruitment firm Search explains.

He says: “We placed 5,000 candidates into permanent roles last year and see changes in how candidates value themselves and how that translates into salary demands and expectations across the market. There is currently increased confidence about employee decisions on pay. They are distinctly aware of what is happening around them.

“They see their employers introducing talent and paying a premium to secure it, and the salary increases that colleagues are offered to stay after handing in their notice. Salary-setting could counteract this feeling of underappreciation by providing a greater sense of employee ownership and loyalty, and increased levels of entrepreneurship, trust, and engagement.”

How do self-set salaries work?

Pim de Morree is a cofounder of Corporate Rebels and has wide experience in interviewing progressive businesses. He says salary self-setting is one of the most advanced ways of bringing employees into the business. 

“Giving people the autonomy and trust to set their own salary means you treat them as full entrepreneurs and owners of the business,” he says. “But vitally important are high levels of trust and transparency within the organisation. If there’s no transparency and everyone can set their salary ridiculously high without anybody knowing of this, it wouldn’t work. Transparency provides a necessary feedback loop in this process.”

Self-set salaries will only succeed in companies that have already established high levels of trust, transparency and autonomy

The biggest benefit of self-set salaries, he says, is that it helps to avoid an uncomfortable battle between employer and employee, which often ends in frustrating negotiations and unsatisfactory outcomes.

“Allowing staff to set their salaries can boost engagement and ownership, as some of the pioneers we’ve visited have shown,” he says. “But the strategy will only succeed in companies that have already established high levels of trust, transparency and autonomy.”

The checks and balances

The process of salary self-setting varies but generally, the employee researches what others in similar roles are paid. Then they create a business case that benchmarks against their performance, the market rate and peer feedback, factoring in the company’s financial position. 

Some companies help employees understand how the company works from a revenue, costs and profit perspective. They also have checks in place, for example, an upper limit on total salary budget, to keep salary expectations realistic and aligned with market rates. Pay pitches are then reviewed by senior leaders and HR and made available to the rest of the staff. Any pay requests that are felt to be unfair can be contested.

ProspHER, which provides training, coaching, and networking to women in business, adopted salary self-setting for its team in April this year. Staff are encouraged to set and review their own salaries through continuous feedback, open communication and performance reviews.

“We make it work by setting Smart (Specific, Measurable, Achievable, Relevant and Time-Bound) goals and reviewing team and individual progress. Staff take accountability and responsibility for their performance and development,” says Serena Fordham, CEO of ProspHER. “From this, individuals work with leaders to agree on rewards, promotions, benefits and pay increases. It is a continuous process, not restricted by a set time frame.”

It’s easier to implement in smaller companies than in large organisations, where multiple levels of employees can make it complex and difficult to manage. But Morning Star, which has 4,500 employees, is a good example of a large organisation that has made it a success. It works with a compensation committee of employees who calibrate and provide feedback on the proposed pay: if conflicts arise, employees have access to a conflict resolution process.

Adapting to business growth

Companies need to reevaluate their business processes as they evolve. Peer-to-peer trading platform Smarkets introduced a set-your-own-salary policy in 2016, when it had around 40 employees. Chief people officer Céline Crawford says: “We introduced it to help combat gender and ethnicity pay gaps and create more equity. As a tech company, we also appreciated our diversity of culture and temperament and quickly realised that bad negotiators or people who were shy should not be penalised. The policy certainly helped with talent retention – but over time, made talent acquisition trickier.”

Following iterations of the initiative, last year Smarkets moved away from complete transparency because, despite streamlining it, the process became a time drain on the organisation and detracted from productivity. 

Crawford says: “It made us less competitive, slow and unable to capture the best talent in an already competitive market because we couldn’t move fast enough in updating internal salaries before attracting the new talent on higher salaries. We didn’t want to create disenchantment across the company.”

Today the company has a formal, top-down salary process based on internal bandings that factor in experience, market rate, employee performance and tenure. “We have developed a powerful muscle over the last five years when it comes to fairness and ensuring that we look at the gender and racial pay gap,” Crawford says. “Having a non-transparent pay policy doesn’t mean those things are no longer important.”

Mind the gender pay gap

Allowing employees a level of autonomy over their pay can reap rewards for the business, but there are also legal and ethical implications that employers need to be mindful of, as Alan Price, CEO of BrightHR, explains. He says: “Self-setting salaries may seem the way forward, but in practice it brings issues for employees and employers alike. Without a clear salary structure, claims for equal pay and discrimination are likely to be more frequent. It is also harder to assess whether an employee warrants a salary increase without a benchmark to gauge performance.”

The impact of salary self-setting on gender pay gaps is another important consideration. Research shows that women find it awkward to negotiate their pay. The pro-salary self-setting camp argues that removing the stumbling block of the negotiation process when recruiting or promoting, and allowing individuals to decide their own worth, based on solid research, could help to close the gender pay gap. But others are less convinced.

Victoria McLean, founder and CEO of career consultancy City CV, says: “Many of the women I speak to, especially women of colour, are more reluctant than men to put a price on their worth. Self-setting salaries sounds great for the employee in principle, but I believe men are more likely to ask for more, and that could widen the gender pay gap. The onus would have to be on the employer to ensure this doesn’t happen and that the whole process is fair and transparent – but women should also be prepared to know and ask for their value.”

Done well, salary self-setting doesn’t result in sky-high salary budgets, nor does it damage the business. It can help to attract and retain talent in a tough labour market. But the key lies with an organisational culture of trust, transparency, and autonomy. As Pim de Morree says: “You don’t want to go down this path if you haven’t got those basics in place.”