One employee asked for three times his usual salary. Granting his request ended up being the best decision this business could have made. This case study shows how letting employees choose their own pay can set you apart from other businesses.
If someone said you could determine exactly how much money you’d be paid, would you be opportunistic and choose an obscenely high number? While your first instinct might be to say ‘Um, of course!’, research suggests you wouldn’t. The majority of us aren’t givers or takers but matchers, meaning we believe in getting what we deserve.
Even if you got overexcited and granted yourself a salary that was far too high for your position, studies indicate you’d probably quickly change your mind and land on a more conservative number as most people feel uncomfortable getting overpaid.
Letting people determine what they’re worth is a key part of the culture at Brazilian manufacturing company Semco, which decided to let employees choose their own pay.
This radical remuneration strategy might seem like a new, progressive approach, but Semco has been offering this to employees this since the late 80s/90s.
“We’ve seen some organisations that are very focused on maximising profits,” says Domenico Pinto, partner ANZ for the Semco Style Institute, the business consultancy arm of Semco, which helps organisations to implement progressive workplace strategies.
“Semco has made amazing profits for many decades, so the focus was on giving back [to employees]. You’re going to make enough money anyway. So why not find a way that works for everyone?” Pinto clarifies that it’s important to be profitable as a business, and you don’t want to adopt any new ways of working that would jeopardise that. His point is that businesses need to be more than just profitable.
Back in the 80s, Semco’s CEO Ricardo Semler took over the company from his father and decided he wanted to run things differently. He felt the company’s culture could use a shake-up; there were too many silos and cliques, and important information was kept behind closed doors. So he starting moving towards developing a more transparent culture.
First, he offered more transparency around what people were getting paid, the business’s profits and details around decision-making processes. The next step, says Pinto, was allowing employees to choose their own pay. This wasn’t just a perk offered to executives of the company, it was for everyone – from the cleaners to those working in the manufacturing side of the business.
Not only could employees choose what they’re paid, they could also choose how they’re paid. In fact, Semco offers eleven different ways to pay people, anything from traditional salaries, to business equity, to commission models.
Reap the benefits when employees choose their own pay
There are a few reasons the consider a policy like this, says Pinto. The first is that people often think the business makes more profit than it actually does. Secondly, most people think they’re underpaid. Both misconceptions can easily be clarified.
“These come from not having access to the right data,” he says. “So why don’t you just give the data to people and give them training to understand and interpret those numbers. That way they have all the information they need.”
At Semco employees play a role in allocating budgets for projects every six months – this is known as ‘process transparency’. Employees can see the business profits; they can see how much is needed for a specific project and then, with what’s left over, they can determine how much of that money should go towards employee salaries. When it comes to setting their own salaries, they get access to two important pieces of information.
“Part of that is to be really clear about the market rate of their job comparable to other companies. Then they also get a view on what the company is making as a profit, in their division and in general. With that combination, they can now go and set their own salary.”
But what happens when this information reveals a large discrepancy in pay between employees with similar levels of experience? For example, it might show that employee A is making $60K per year and Employee B is making $100K. Semco’s view is that if employee A wants to be making $100K, there might be an opportunity for them to put their hand up and say they’re worth more. In fact, more often than not, Semco is likely to give them that opportunity.
Take one 23-year-old employee, for example. Given the opportunity to set his own pay, he told Ricardo Semler he was worth triple his current salary. In a podcast interview, Semler said: “We thought… this person must have something that we don’t know [about] because he obviously wasn’t narcissistic. It was just a very calm feeling that he knew he was worth three times as much. And so we pulled him out of the group… and we said, let’s do something else.”
That ‘something else’ was Semco’s Lost In Space program.
“This is a program that was created to attract talent and give them the opportunity to roam around and get involved in different parts of the business,” says Pinto. Essentially, creating your career on the fly.
The Lost In Space program is a great opportunity to secure high-potential employees into your business when you might not have an existing role available for them yet.
“A great example is of an IT person who was somewhat of a guru at a young age. Ricardo convinced him to come over and work in the Lost in Space Program by saying, “Hey, I don’t have a job for you, but I know I want you to work with us.” And then from there, within a couple of days, he had developed a new IT system that’s now enabling people to work from home [more easily]. He found himself a natural role.”
“We don’t have employees feeling like they’re underpaid because they are literally deciding their salary for themselves.” – Domenico Pinto, partner ANZ for the Semco Style Institute.
The 23-year-old employee was put into this program, and Semler quickly realised he had been underestimating him.
“He was no good at articulating [himself],” says Semler. “But he was a profound thinker.”
The only rule was that he had to prove he was making his tripled salary every month, which he did. Eventually, he ended up becoming the CEO of one of Semco’s most important businesses.
Of course, it’s easy to dismiss this anecdote as a happy accident. But the research backs up Semco’s approach.
Even though employees are likely to ask for more money during a set-your-own pay negotiation, if they are granted an increased salary, they’ll likely generate higher profits as a result because their effort levels increase and they think in more creative, innovative ways.
“If you really think about it, what’s the worst that can happen? You might lose a month or two of [money by paying the higher salary], but you’re not going to let someone go on for years if it’s not working out,” says Pinto.
Not only could a model like this give you the opportunity to develop top-tier talent, it’s also likely to boost the performance of your existing workforce.
“When you give this kind of transparency and freedom to people, they normally overperform because they’re not holding back,” says Pinto. “It also prevents people from jumping ship due to salary issues. We don’t have employees feeling like they’re underpaid because they’re literally deciding their salary for themselves.”
As you can imagine, attracting talent is also a much easier process with a policy like this. They don’t have candidates coming into job interviews excited about the role, only to leave the salary negotiations feeling disheartened.
“They’re getting a high level of engagement before they even start,” Pinto adds. “All that negative sentiment about negotiating salary is completely gone.”
Surprisingly, the anecdote of the employee asking to triple his salary is an anomaly. It’s far more common for employees to undervalue themselves, says Pinto. And a huge part of Semco’s culture is advocating to raise employees’ salaries when they undervalue themselves.
“The mindset of many companies would be, ‘Cool, we saved some money.’ [Our mindset] is to educate the people about their value and ask them to raise it to an acceptable figure [that aligns with market rates].” This might sound a little too good to be true, but Semco has been known to bump up employee’s salary expectations by up to 25 per cent when staff underestimated the market value of their position.
While Pinto’s experience of employees setting their own salaries has been positive, Semler, in his podcast interview, does nod to the fact that it doesn’t always work out. For example, someone might set themselves a really high salary and then not be able to meet the required benchmarks.
However, this isn’t to say they’re fired for underperformance. Instead, employees are given the opportunity to shift around in the organisation and find a role that’s better suited to them.
Would it work in your business?
You might think Semco is a unicorn and that these radical work practices couldn’t be transferred elsewhere. But Pinto disagrees.
“Some people think, ‘This could only work in small companies. This can only work in certain sectors. This can only work in certain countries.’ But now [Semco] is operating in so many different countries.” And its business ventures all span different sizes and industries.
When asked why he thinks more Australian companies aren’t adopting practices like this, Pinto says Australian employers are usually more comfortable being the observer when it comes to radical new ways of working.
“We like reading about things that are happening overseas, but we don’t always like to be the ones trying it. We’re waiting for someone else to do it. Also, in places like Europe and the US, there’s a lot more competition. So there’s more eagerness to try new things to get an edge on the competition.”
Also, culturally, there could be an element of tall poppy syndrome holding employees back from asking for what they believe they’re worth. Pinto refers to an Australian employee that he’s coaching who was offered a raise by his company.
“He said, ‘Yeah, I’m okay with that, but I’m actually worth a lot more.’ And the company was like, ‘What do you mean? You’ve been given a raise. Don’t you appreciate that?’ But when you looked at the data, he was actually right. He was still massively underpaid.”
Do the groundwork
While the conversation about letting Semco employees choose their own pay is the one that generates the most interest compared to the company’s other progressive approaches to work, Pinto says it’s not the place to start if you’re undergoing a cultural transformation. There is a lot of foundational work that needs to happen before something like this could work. And businesses would first need the financial means in order to offer a policy like this.
“If [letting employees choose their own pay] is a business goal, you first need to start with broader transparency around decision-making, and make the [company data] available for everyone.”
You also need to have a relatively flat organisation, or a flat organisation mindset. Leaders can’t rule with an iron fist or dictate people’s experience of work. They need to empower, coach and guide employees to make the right decisions for themselves and the company.
“The position of the leaders is to either work on the system, for the very senior leaders. Or for those in middle management, it’s to enable people in their teams to make their own decisions and solve their own problems.”
If you wanted to test the waters and encourage greater autonomy, you could start by seeking more input from staff regarding organisational decisions.
“We started with simple things like asking, ‘What kind of uniforms do you want to wear? What times do you want to come to work and leave? How do you want to structure yourself as a team?’ And then from there it naturally evolved into more transparency.”
We’re at a point in the history of work where we’re starting to challenge some of the traditional methods, says Pinto, and many businesses are doing this for the first time.
“Very often salaries are set the way we were set 20 years ago. They haven’t really changed at all. And so you might find you have people in roles that are either completely overpaid, or completely underpaid and so you’re really not competitive. The future of work is going to see a war for talent and this ensures that your [business is attractive to existing and future talent].”
This article is the first in a three-part series on new ways to think about paying employees.
Does your business have an innovative approach to work that you want to share or want to discuss the realities of letting employees choose their own pay? Start the conversation by joining the AHRI LinkedIn Lounge. Exclusive to AHRI members.