Should you decide what you are paid?

If you work for Makers, a small London-based software engineering boot camp founded in 2012, everyone will know what you are paid.

Makers asks its employees to set their own salaries instead of entering the traditional — the company calls it “adversarial” — negotiation with their manager.

Staff are invited to think about what they are worth, researching the market and discussing their role and performance with close colleagues. They then submit an “essay” justifying any pay increase (or decrease) to their team for comment. The eventual outcome is shared with the rest of the business. “This is not a democratic vote,” co-founder Evgeny Shadchnev wrote in a blogpost. “The decison-maker is you.”

When I asked him about the system, he made light of the innovation: “What we’re doing isn’t as extreme as it may seem. We’re using the same tried-and-tested process, getting feedback from colleagues and contacts and encouraging reflection on it, but we are entrusting the process to yourself rather than your supervisors.”

Few companies reveal what individuals are paid, or how pay levels are set — seemingly for good reason.

When I advocated greater openness once, a reader commented: “I’ve seen what radical pay transparency looks like; it was all the rage in the late 1990s and my wife’s firm used it. The ensuing envy and pettiness nearly sank the organisation. Why? Because everyone thinks they are worth more than their peers!”

Mandatory publication of gender pay ratios in the UK has had positive effects, shining light on inequities and narrowing the gap, but proposals to oblige companies to publish the ratio between the best-paid and median employees still make chief executives, boards and personnel departments tremble. One fear is that publication of pay levels or ratios will attract unfairly critical media scrutiny; another is that pay transparency will spread discontent and that minions will be demoralised if they learn how well paid their managers are.

The latest research suggests not all those concerns are justified. Zoe Cullen of Harvard Business School and Ricardo Perez-Truglia at UCLA’s Anderson School of Management looked at more than 2,000 workers at a large commercial bank. “We expected there to be a level of resentment” about vertical pay differences, Prof Cullen told me. Instead, staff worked harder when they learnt how much managers a few levels above them earned. This motivational effect wore off when they compared their pay with that of executives several promotions away.

The reverse happened when staff learnt that their peers earned more than they did. People who found out the worker on the next desk was paid 10 per cent more spent 9.4 per cent fewer hours in the office.

Based on these findings, companies should ensure pay bands are narrow for workers doing similar jobs. At the same time, they could benefit by advertising the rewards available to those who win promotion — and even widening the gap between bands.

What about complete transparency? Start-ups such as Makers are by definition small and can dictate their own radical pay policies. According to Prof Cullen, “they can use transparency as a bargaining chip: ‘I can’t pay you more than this because then I’d have to pay everyone more’”.

Opening up the payroll data of established companies is bound to be more complicated, though. Researchers have not fully explored the overall effect on morale when pay levels are revealed to envious insiders, to nosy media and to rivals with a war chest to lure away under-appreciated stars.

Prof Cullen suggests companies experiment by asking employees about their preferences for transparency. Subtle ways of publicising relative salary levels include inviting staff to guess pay for different roles and rewarding the most accurate guesses. Personally, I still think large companies risk little by being more open about pay, but they should reveal median pay for roles rather than individual salaries.

At Makers, pay inflation is an ever-present risk. Nobody has yet asked for a pay decrease, though someone did once consider it. A bigger problem, Shadchnev told me, is people procrastinating and then realising “they should have had a raise years ago and now need a large raise that’s difficult to justify”. The company has also uncovered interesting gender differences: men apparently decide to increase their salaries by about 5 per cent more than women.

Shadchnev stands by Makers’ commitment to a system based on mutual trust, but nods to the possibility that the pay taboo will eventually loom larger than it does now. In August, the group agreed salary requests for £100,000 or more would have to be signed off by the board. One day, he writes, “we may decide that a more traditional approach suits us better. After all, every approach has its limitations.”

Andrew Hill is the FT’s management editor