Did you know that 80% of companies base annual pay increases on performance? Doing so may seem like a no-brainer, especially since other studies like Lattice’s State of People Strategy show effective pay-for-performance strategies are indicators of individual and company performance.
But despite this evidence, we at Gorgias believe compensation shouldn't be based on performance. Yes, we promote people when they perform at the next level. But we never, ever provide individual salary raises (that aren’t tied to promotions) based on performance.
You might be raising an eyebrow, but don’t click away. Removing performance-based compensation helps us reduce bias and focus on long-term growth.
Here’s our compensation plan in a nutshell:
- We base compensation on benchmark data and rely on multiple databases to define our compensation grid. (Notice I don't say "compensation bands" because we don't believe in bands. It's one number, period).
- We pay well. This part is extremely important because a company with low base salary and no variable pay will struggle to attract talent. You must pay well, especially if you want to eliminate merit increases.
- Our compensation grid, aka "Salary calculator," is transparent and accessible to everyone at Gorgias, as well as externally. Check out our salary calculator to get a better sense of our compensation system.
- We don't negotiate offers. I know, it's hard to believe. But it's true! We have our grid, we're confident in what we offer, and we stick to it.
Why compensation shouldn’t be based on performance
First, let’s define what we mean by compensation here. In this post, I discuss the total package offered upon hiring and the so-called “merit cycle” which gives financial rewards to “top performers.”
I won’t open the topic of commissions, which is a slightly different pay structure. It’s also an interesting topic — maybe a future post?
Regardless, here are the main reasons we don’t believe in compensation models that reward individual performance.
Biases are lurking everywhere (yes, even if you're a great manager)
Startups move fast, and managers do too. Even managers who are aware of bias are still susceptible to them. And evaluations of employee performance are very hard to rid of bias.
Let me ask you this: Would all employees have the same salary today if they had different managers? At most organizations, the answer is no. When one manager decides yearly compensation of their direct reports, those direct reports end up with subjective, bias-ridden compensation. That’s no good.
You're probably well aware of biases, so let's skip the usual suspects like affinity bias (which makes you like more people who are similar to you) and focus on others.
Pressure bias occurs when an employee constantly talks about money and puts pressure on you to give them more. A common response is to compromise, just to end the uncomfortable pressure: "Alright, I'll give them at least a 3% raise so they won't complain forever."
You might be thinking, "I'm experienced and wouldn't do that." That might be true. But a more junior manager might reward employees who apply this kind of pressure, and that's a problem.
Visibility bias is the phenomenon of noticing (and rewarding) an employee just because of visibility. Perhaps they had a very visible project, or are vocal in meetings and on Slack. Or, perhaps they work in the same office as their manager and get more one-on-one time than remote teammates.
Just because you — or even the CEO — see more of one person or their projects doesn’t mean that person had the strongest impact. And it definitely doesn’t mean they deserve more compensation than teammates with less visibility.
Ah, my favorite topic. Let me illustrate with an example.
Imagine you have three employees. The first one has been here the whole year. The latter two have been absent for a few months due to illness and maternity leave. They've only been present for two or three quarters out of the four.
If you pay based on performance, you should reward the employee who had a greater impact by simply being present and shipping projects — right? But if this is the case, the employees would be punished simply for taking time off (which is a legal right).
Women are still paid 16% less than men in the US and 18% less in Europe. The same issue applies to people with disabilities. Compensation-based performance perpetuates these unfortunate statistics.
"But wait," you might argue, "performance should be assessed when the employee is here. If someone is absent for several months, you evaluate their performance and increase based on the period of presence."
This compensation strategy makes sense in theory but introduces room for interpretation and “gaming the system.” Now, employees have to strategically plan their absences around the annual performance appraisal to ensure they don't miss out.
What about a mother who is having her third pregnancy and is entitled to a one-year leave in many countries and companies? Would you truly base her performance increase on her performance from a year ago?
By penalizing employees for being away for a few months, you're creating unnecessary complexity and potential discrimination.
Performance is unlikely to remain stable over time
You may excel in one project, perform slightly below par in the next, and then shine again in another.
Let’s say your scope switches a bit and suddenly you’re not as great at keeping up with everything, you’re just good. However, your compensation is still higher — even if a colleague is now performing at a higher level.
It's the famous Peter Principle in action: People end up in positions where they perform at their worst because when they're great, they keep getting promoted.
By paying based on performance you apply the Peter Principle on compensation: You will ultimately pay employees more than the level of their performance.
For the same reason, we don’t believe compensation should be based on tenure. If you are rewarded for your tenure, over the years, you’ll become isolated at a very high level of compensation and misaligned with the market.
As the years pass, it will become extremely hard for you to find a job that pays what you expect and ultimately you can become unemployable. As a consequence, you’ll be very likely to stay but not for good reasons.
You might create tension within the team
"But if you don't pay based on performance,” you say. “How is it fair that a high performer makes the same as an average performer?"
My answer is simple: As a human resources leader or a Manager, you must work tirelessly to avoid having average team players. You don't want average; you want excellence. A+ players only, period.
"This is unrealistic," you say. "You'll definitely have average employees, even poor ones."
I agree. But not for long. If you set high expectations and transparently communicate this at a company level, there are no surprises. If someone misses their performance goals too many quarters in a row and becomes a low performer, we trigger a performance improvement plan (PIP).
At Gorgias, our ultimate goal is to have the absolute best versions of ourselves in every corner of the company. Pay-for-performance programs force people to constantly strive to be "better" than others, which directly contradicts our company's vision of fostering high talent density. We believe this model leads to better employee engagement and company culture.
And ultimately, pay-for-performance doesn't work for top performers. When someone sees themselves as a rockstar and expects a 20% increase, but only receives 5%, it creates a misalignment between their beliefs and reality. With performance-based compensation as an option, it’s hard to make top performers (or anyone, really) satisfied.
But what if a candidate wants more? Should we make performance-based pay exceptions to keep them?
Well, dear hiring manager, I'm sorry to burst your bubble, but no.
We share our compensation package with candidates right at the beginning of the hiring process (they can even check our salary calculator). If they say they're good with it, they're good with it. No surprises at the end, we offer exactly what we've shared from the start.
Being absolutely inflexible on this matter has made my life (and the lives of everyone involved in the hiring process) so much easier. No need to negotiate with HR when sending an offer. No need to get finance involved to revalidate the budget. It's smooth sailing.
Will this scale (and is it right for everyone)?
I'm not saying that paying for performance is inherently bad. Obviously, if 80% of companies do it, there must be advantages like boosting retention of top talent.
I'm also aware that my vision may seem utopian. Maybe it's not entirely scalable, and perhaps we'll have to revisit our principles at some point.
But I've been told so many times that many things were not scalable and proved the opposite.
Not yielding is hard. Sticking to your principles is challenging. But adhering to your core principles is what creates wonderfully exciting machines like Stripe, Netflix, Apple, and Amazon.
You might think, "When people join a 20-person company, they know they're expected to work hard and strive for excellence. But when they join a 250-person company like Gorgias, they're not looking to work hard without direct compensation increases."
Maybe that’s true for some employees. As for me, I've worked just as hard in my previous 400,000-person company as I do in my current 250-person company.
And for those who desire something different, that’s okay. We just have to make our stance and policies clear and transparent in the interview process.
Yes, Gorgias is not for everyone. It's for people who thrive in a fast-paced environment, possess a growth mindset, and want to advance their careers. It's completely fine if it's not for you.
As long as we're aligned and embrace this statement, I sincerely believe we can continue scaling by paying people with the same job title and seniority level the same salary.