Yesterday we considered the error companies make by basing offers on salary history, instead of future performance.

That may be about to end, at least in the outliers of Philadelphia and New York City.

In short, the law prevents employers from asking candidates about their current/previous compensation.

Candidates can volunteer the information, but can’t be asked for it by the company or any recruiting process, including third parties.

Doing so opens them up for lawsuits.

Ignoring implementation and legal hurdles, what does it really mean and why do I see it as such a positive?

Primarily because I don’t believe that either performance history or salary history has a damn thing to do with the value candidates bring to their next job.

Companies need to have a hiring range for each opportunity based on the impact that specific position should have on the company’s success.

The low end is based on average performance, while the high end is the result of an over achiever in the position.

The offer should be the highest number within the range based on the hiring manager’s evaluation of the candidate in light of two strong constants.

1. 98% of star performers become stars as a function of their management and the ecosystem in which they perform.
2. People who join for money will leave for more money.

Merit raises are then given based on that individual’s actual contribution to the company’s success, as opposed to some number from HR.

This puts most of the responsibility on the hiring manager — exactly where it belongs.

Image credit: gardener41

Do you remember last August when news that Dan Price, CEO of Gravity Payments, was raising the the minimum wage at his company to $70,000, phased in over the next three years, and all hell broke loose?

Reality-show offers, book deals, research requests from Harvard, both complimentary and scathing media attention; and, hilariously, Rush Limbaugh calling a socialist.

He partly funded the move by cutting his own salary from $1.1 million to $70K.

So what happened?

So far, the results are positive.

…the publicity he’s gotten would boost new customer inquiries from 30 per month to 2,000 within two weeks. (…) customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit — a nonevent.

The short reason Price did what he did was because he realized he wasn’t living the values he was raised with and in which he believed.

Obviously, it’s more complicated than that, so read the article.

Then think, really think, about how you can translate your values and beliefs into tangible actions, as opposed to empty words.

Flickr image credit: Gravity Payments

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

1. How fair is your company’s compensation plan?
2. Do you have a compensation plan for both salary and stock?
3. Do you pay your “stars” more, whether cash, stock or both?
4. Do you offer it to lure them in the door?

If you answer ‘yes’ to questions 3 and 4 then you must answer ‘no’ to 1 and 2.

Winging it with no plan is a major ingredient of financial disaster.

Offering high salaries and/or giant stock options before knowing how well a person will perform at your startup is a recipe for talent disaster—history may not accurately predict the future.

One of the key determinants of satisfaction — or dissatisfaction — with compensation is how employees feel their pay package compares to others, according to Wharton management professor Matthew Bidwell. “No doubt if somebody thinks he or she is doing the same work as another who is paid a lot more, this leads to resentment and ultimately to disengagement.”

And the last thing you need in a startup is resentment and disengagement.

Image credit: HikingArtist

Image credit: asifthebes

Be sure to read yesterday’s post for background on ‘fair’.

When setting compensation, never forget that credentials are well known, promotions are public and salary news travels faster than naughty gossip, so secret is not an option.

Problems start when a person doing the same work and with a similar background as the person in the next cube gets X more dollars or a promotion for reasons that have nothing to do with skill, experience, attitude or actual work, but rather for charm, politics, or managerial whim.

This approach also works for companies with flat organizations, such as the one Phil Gerbyshak described over at Slacker Manager, where most people have the same title.

For convenience we’ll call them knowledge workers.

1. Department heads are responsible for establishing title categories, including the parameters for education, experience, skills, etc. The fineness is dependent on the size of your organization and the difference experience-wise between entry level and senior. For example,

• Knowledge worker I
• Knowledge worker ll
• Knowledge workers lll
• Senior knowledge worker
• Principle
• Fellow

2. Each category carries its own salary range, ideally a spread around $20K. Again, depending on your business it can be less, but rarely more.

3. Each category has different responsibilities with the actual work structured so your people enjoy solid challenges and opportunities to grow.

4. Working together, department heads and their managerial reports (if any) assign all current employees to the correct level.

5. The department head then meets with the entire department and explains the new system.

6. The department head and any other managers involved meet with their direct reports to explain to what category they’ve been assigned and why.

Here’s an example to help you visualize it.

Let’s say that you decide on a three-level structure in your department because the senior title is given only rarely.

You currently have two people who are Analyst l, range $40K-$60K,

• Craig, who just graduated was hired at $48K; and
• Julie at $55K, who has three years, two of them with you.

You have five people who are Analyst II, range $60K-$80K,

• Trudy was recently promoted and is at $62K;
• Jason, $68K, and Craig, $72K, both have been working for six years. Although Jim has an MBA, he started in sales, while Craig had three years’ experience in a specifically needed skill when he was hired;
• Terry is making mid-seventies with five years of direct experience; and
• Kim, at $80K and due for promotion to Analyst lll, has a Masters’ and 17 years of experience, 5 of them in directly in your field.

Along with keeping the structure transparent and honest, it’s imperative to be sure that every new hire clearly understands the structure and the career path it offers.

What compensation techniques do you use?