What you pay says a lot about your company and if your employees feel valued.

Salary Formula

At Management 3.0 we talk about salary formulas a lot and are constantly experimenting with new ideas that might work. The most important thing about having a good compensation plan is that it’s not only fair but it supports the culture of an organization. Done well, a salary formula can help you keep the trust, prevent demotivation, and pave the way to total transparency.

Money is a sensitive topic, and treating this topic delicately requires some thought, foresight, and organization.

Jurgen Appelo

Why is it so important to have a well-defined salary formula?

Salary Formula Happy Workers
  • We want the world to know that we pay people fairly for the value they create.
  • A good plan will let us attract and keep the right people.
  • A good compensation plan can create stability in uncertain times within an organization.
  • Of course money influences motivation. A good compensation plan makes sure that joy and productivity stay strong too.
  • This all reinforces a culture of trust.

Before we delve into creating the perfect plan it’s worth discussing what the compensation will be based on. We have three options:

1: We can pay people for the time they make themselves available, and leave it to their managers and peers to get the most out of their presence

2: We can pay people for the results they generate for the organization and leave it to managers and peers to provide them with useful input.

3: We can pay people for the effort they put into their work and leave it to managers and peers to turn that effort into successful results.

Never forget that you get what you pay for and so the final requirement for a compensation plan needs to focus on a culture of good behaviors. A good compensation plan helps everyone to focus on experimental learning and deliberate practice.

Changing the salary structure in a business is not easy, but you have to start somewhere and we want to help make it as painless as possible. So why not start with…

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Man presenting (Illustration)

1: Make a set of job categories and tags that represent all people’s jobs in the organization.

2: Add any optional variables, for age, tenure, education, or other things that are valued in your organization’s culture.

3: Look up what your employees currently earn.

4: Keep an eye on what employees earn at other companies with comparable business models.

5: Create a salary formula that approximately calculates people’s current salaries from the variables you identified. Keep improving the formula until the only differences with people’s actual salaries are either minor and unimportant, or big and inexplicable.

6: Start planning to erase the differences between what the formula says people should earn, and what they actually earn now.

7: When you have a plan to get people’s salaries back on track, in line with your salary formula, it will be time to start planning for transparency.