Compensation and incentives

The topic of compensation and incentives includes the process of how salaries are set and by whom, the types of incentives being used, and the issue of compensation inequality.

A New Perspective

In Teal Organizations, compensation is determined not only in a different way, but takes on a fundamentally different nature and level of importance. Typically these organizations exhibit the following general characteristics with regard to compensation:

  • People set their own salaries, with guidance from their peers.
  • There are no individual or team incentives, as incentives are seen to distract people from their inner motivation, and to skew behaviors.
  • While not necessarily explicitly attempting to create an egalitarian pay structure, it seems that in these organizations, people strive to reduce the sometimes extreme pay disparities witnessed in many sectors today. A special focus is to ensure that the lowest paid make enough to satisfy basic needs.

In contrast, compensation and incentives in earlier stage organizations can be summarized as follows:

Red Organizations

In the Red paradigm, the prerogative of the boss is to freely, on a whim, decide to increase or reduce pay. There are no formal processes for negotiating on pay, nor any formal, documented incentive processes.

Amber Organizations

In the Amber paradigm, compensation is generally fixed and determined by a person’s level in the hierarchy (or other fixed status marker, such as the person’s type of university degree). There are no individual salary negotiations, no incentives. It’s “same work, same pay”.

Orange Organizations

In the Orange paradigm, there is some individual negotiation of base salary, and people generally fall into salary bands. A boss has some freedom to increase someone’s pay within that salary band. Orange believes strongly in individual targets and incentives. If people reach predetermined targets (that ideally belong to a cascaded system of targets or budget that builds up to strong creation of shareholder value), they will receive a hardy bonus. Strong differences in pay between top and bottom earners are seen as perfectly acceptable, as they reflect people’s merits and contributions.

Green Organizations

The Green paradigm believes in cooperation as much as in competition; individual incentives begin to make way for team bonuses. Attempts are made to reduce the difference between the highest and lowest earners in the workplace, for instance through a maximum multiple between the CEO pay and the median (or lowest) salary in the organization.

In Practice

How salaries are set and by whom

In traditional organizations, compensation is typically determined according to the organizational hierarchy. Generally, a boss can decide on a pay raise for his subordinates, often subject to HR (or institutional) guidelines or approval. In self-managing organizations, in the absence of bosses, the process to determine salaries and other types of compensation must be reinvented using the power of peer input. It seems that there are two broad categories of systems: ranking-based systems and self-set (advice-based) systems. [Both of these can be used within hierarchical systems too. They don't depend on self-managing structures.]

Ranking-based systems

In certain companies, such as W. L. Gore or HolacracyOne, employees rank or evaluate the contributions of the peers they work with most closely. Based on this input, people are allocated to different salary bands - usually by an algorithm or an elected committee. People who are seen as contributing more will find themselves in the higher bands that earn bigger salaries; the more junior, less experienced colleagues naturally gravitate toward bands with lower salaries. The process is simple and easy to understand and it is generally seen as fair. When it’s not just one person (the boss), but many of an individual's colleagues informing the process, the resulting salary is likely to be a fairer reflection of that person's contribution.

Such systems can result in pay fluctuating (going up but also down) over the years, depending on people's contribution. In many countries, labor laws prevent salaries from going down, which requires adaptations to this method. For instance, the system could be used only to discern which colleagues should receive a pay raise. Alternatively, a system can be engineered using a low fixed salary, and allowing the fluctuations through individual bonuses that can go up or down.

Self-set (advice-based) systems

A more empowering version is one where people set their own salaries, calibrated by the advice process from their peers. In this case, generally once a year, people propose what salary raise they believe to be appropriate for themselves, and the justifications for their proposal. This input is reviewed by a number of peers (e.g. in an elected salary advice group) who give individual advice on that proposal, based on a calibration across colleagues. Individuals can then choose to follow the advice they have received or not, and their choice is made public. If it so chooses, the salary advice group can choose to declare a conflict and invoke the conflict resolution mechanism.

The process cuts through much of the haggling, strategizing, complaining, and "sucking up" that happens when salaries are set by one's boss. If people are unhappy with their salary, they can simply raise it. And they will face the consequences of their choices, if they decide to place themselves too far outside their peers' advice.

Use of incentives

In the Teal paradigm, people value intrinsic over extrinsic motivators. Once people make enough money to cover their basic needs, what matters most is that work is meaningful and that they can express their talents and callings at work. In the book Drive, Daniel Pink concludes from a great amount of research on the matter that in today’s complex work settings, incentives are mostly counterproductive, reducing rather than enhancing people’s performance.

The consequence is that Teal Organizations generally operate without explicit financial incentives at individual and team level. No one, not even sales people, has targets or incentives and there are rarely individual bonuses or stock options. Instead, at the end of very profitable years, some part of the profit will be shared with all employees (in some cases everyone receives the same fixed percent of base salary, in others everyone receives the same fixed amount). See also Ownership.

Compensation inequality

Without the use of bonuses and stock options, compensation inequality is automatically reduced, as a large share of the pay inequalities in today's Fortune 500 companies stem from the often extravagant CEO bonuses and stock options. Some organizations also strive consciously to limit inequality in the base salary. Some organizations, like AES and FAVI, have replaced hourly wages with monthly salaries for shop floor operators, erasing the distinction between blue- and white-collar workers. Everyone is compensated on the same principles.

Frequently Asked Questions

The advice process (and if needed the conflict resolution mechanism) generally prevents a situation where one individual gets a raise that would be disproportionately high. But one might then ask "what prevents a sort of (even unconscious) collusion whereby everyone grants themselves big raises, thereby inflating the entire payroll of the organization to a degree where it might hurt shareholders or even the organizations purpose?" This doesn't seem to be a problem with the pioneering organizations that use self-set pay. Here is how they seem to go about it.

  • In some organizations (such as Morning Star in California), everyone needs to benchmark their salaries to a market rate. They institute a rule of thumb, for example, that salaries shouldn't be higher than 110% of the industry average. They might support this with the arguments that if salaries are too high, this allows for less investment and future development, makes the organization less able to achieve its purpose or is unfair to the shareholders.

  • Many of the organizations researched are very profitable, and pay out a lot in profit sharing (workers at FAVI typically make the equivalent of 17 or 18 months of salary this way). The idea, therefore, is to keep compensation in line with the industry, and when profits allow, top up the salary with profit sharing. This reduces the incentive to try and increase one's base salary, knowing also that in bad times, jobs are more secure if the base salaries aren't inflated.

  • Some organizations (like FAVI in the north of France) find it useful to have a simple rule of thumb for the organization overall: Revenues should break down into X% for salaries, Y% for material costs, Z% for investments so that a healthy P% of profit remains. Everyone seems to accept this rule as good common sense. This is the basis for what can be shared in profit sharing. If needed, the salary advice group could share these parameters with everyone upfront, for instance in years with low profitability.

When some information is secret, it tends to generate rumors. For what reason would salary information be made a secret? Probably because of the idea that some people would be shocked by some of the information and claim the salary distribution is not fair.

From a Teal perspective, such discussions shouldn't be feared and avoided, but can be steered in productive ways. They can help bring to light unspoken issues and hidden grievances. They can help people grow as part of the process, in dealing with their relations to one another and to money. And perhaps, indeed, to correct some obviously unfair situations that might have slipped in over time.

For this reason, many organizations choose to make information totally public. (The social media app maker Buffer even publishes everyone's salary online). Some organizations, like the tomato-processing company Morning Star, have chosen to make the salary increase percentages public within the organization, but not the base salary. That might be an intermediary step towards full transparency for an organization to take.

There are several documented examples of self-managing organizations where colleagues have voluntarily decided to temporarily reduce their salaries to weather a downturn so as to avoid having to lay-off staff. In self-managing organizations, all information tends to be public and there is generally a high level of maturity and literacy when it comes to financial matters. In a traditional organization, when revenues are down and the organization faces heavy losses, plans are often made secretly within HR for redundancies. In self-managing organizations, everyone sees the storm coming. Someone, at some point, calls in everyone (or in a large organization, might invite a cross-section of the organization) to a meeting to say: what do we do? From the group, solutions emerge, which in many cases simply come down to everyone agreeing to a temporary salary reduction (with often the highest salaries taking a higher percentage cut).

Semco, the Brazilian firm that Ricardo Semler's bestseller Maverick made famous, has put in place a "voluntary risk program" to institutionalize such salary reductions to protect the organization in times of crisis (to which Brazil has been prone over the last several decades). Employees are offered the option of a risk salary program. They take a pay cut of 25 percent and then receive a supplement raising their compensation to 125 percent if the company has a good year. If the company does poorly, they only receive 75 percent of their salary. As the good years outweigh the bad, the deal is favorable to employees willing to take a risk.

Self-management

Self-set or ranking-based salaries are a key enabler to self-management: in traditional hierarchical structures, bosses decide on the salary raises and bonuses of their subordinates; in self-managing systems, it is necessary to upgrade to peer-based compensation mechanisms.

[And yet, self-set or ranking-based systems can also be implemented within traditional hierarchical structures. It can be a step towards ultimately replacing hierarchy with self-management. Within an organization where complete self-management isn't in the cards (for instance if the board of directors wouldn't accept that the organization let go of a pyramid structure), it can also be an important step to take some power out of the boss-subordinate relationship and create more of a team-based collaborative spirit.]

Wholeness

When there is one boss that decides over a person's salary, it's tempting to want to please that person, to conform to their expectations, to not speak one's truth. When it's not one person, but a great number of colleagues one works with who calibrate one's salary increase, most people naturally relax into showing up more truthfully. In this way, self-set or ranking based compensation mechanisms help colleagues show up more easily from a place of wholeness.

They also help us take an adult stance towards compensation. Traditional boss-subordinate relationship tend to push employees to behave like children and bosses like parents. Self-set or ranking based compensation systems also do away, almost instantly, with much of the strategizing, haggling and complaining around compensation, with everyone forced to take an adult-to-adult stance.

Evolutionary purpose

[The link between evolutionary purpose and compensation practices can show up in times of crisis. There are several documented cases of self-managing where workers, in a severe downturn, choose voluntarily to reduce their compensations on a temporary basis to avoid lay-offs. In self-managing organizations, colleagues often often have a high level of financial knowledge and maturity, and choose to contribute to save their colleagues jobs and to maintain the organizations ability to pursue its purpose with all its skills and resources.]

[Teal organizations are built on the premise that individuals are primarily motivated, after attaining basic needs, by intrinsic factors such as the pursuit of purpose. Thus, they tend not to exhibit the primacy of compensation, including added incentives, typical in Orange or even Green.]

Concrete cases for inspiration

Related Topics

    Notes and references