With the closing of the Mad Men era, what is old is popular once again.
Silicon Valley may be known for its colorful workplaces and free catered lunches, but its true innovation in compensation was exchanging the rigid tenure-based salary systems of East Coast professional firms for the meritocracy of the pure labor market. Everyone must discover their own competitive wage and equity level in the marketplace, and if done properly, this level should match the productivity of the worker.
That meritocracy argument has not been entirely shattered, but it certainly has been under extensive attack lately as new data about differences in salaries – particularly between male and female tech workers – has been released by Silicon Valley companies. Satya Nadella, CEO of Microsoft, got into hot water for his comments that women should have “faith” that they will be paid properly.
Technology firms are now swinging the pendulum the other way on compensation, moving away from pure market-driven wages for every individual worker and toward lockstep salaries that pay everyone at a certain level equally. Some workers will chafe under such uniformity, but there are real benefits to the model that deserve a wider look from founders and HR executives.
The Lockstep Way
The idea of lockstep salaries is simple: workers should be paid equally for equal levels of experience or title. Thus, a newly-minted college graduate should be paid consistently throughout a company, and all vice presidents should be paid the same. To receive a higher salary, a worker should get promoted or stay longer at a company to reap the benefits of years of service.
This system remains quite common in the United States. Nearly all government workers are assigned grades and steps that determine the exact salaries they will receive. Elite professional services firms also tend to use these models, particularly in fields like law where almost all associates are paid equally based on years of experience (although the industry is changing in the wake of the global financial crisis).
There are immense benefits to the lockstep model. Foremost among them is that these sorts of salaries can potentially foster greater cooperation within an organization. Raises are no longer perceived as a zero-sum game, especially compared to organizations that use stack ranking as their means of evaluating employees.
Of course, we immediately encounter everyone’s greatest fear about this model: that workers will shirk their work since they know that their individual performance doesn’t matter to whether they get next year’s salary bump.
However, there are several ways around this concern. First, an up-or-out model is quite effective in ensuring that workers are still operating at their peak performance. That’s the model that is used in law firms, in which promotion to partner is the main goal for every associate, but access to that promotion is limited to a small percentage of employees.
Perhaps more importantly, an organization’s culture matters tremendously in how workers approach their craft. Organizations have the ability to inculcate workers to see their craft as above immediate salary goals. Professional service firms emphasize service to the client as a means of building this sort of performance-driven culture even when salaries are lockstep.
Negotiation-Free and Transparent Workplaces
Outside of reduced competition, two other advantages to lockstep are eliminating salary negotiations and increasing transparency. On the first, few people effectively negotiate with their employers for salary increases, and a lot of people fail to negotiate at all. Companies perform better at negotiations than workers, for the simple fact that they do it all the time compared to their employees.
The net effect of this situation is that employees – even those doing the exact same tasks – can be paid tremendously different wages.
This is one of the largest concerns today in equality for women in Silicon Valley and really throughout the United States. Studies have repeatedly shown that women are less likely to negotiate their salaries, for a host of different reasons. This difference between the genders is one explanation for the persistent female pay gap.
However, negotiations don’t just disadvantage women, but can harm the employee-employer relationship for everyone. There is an awkward moment just after receiving a job offer from a company when we are expected to begin these salary negotiations. Just as we are getting to know each other and becoming partners, we now have to argue for some more salary dollars. Lockstep salaries ensure that this relationship grows naturally instead.
The other side of removing negotiation is increasing transparency in an organization, which may reduce office politics as well. While some organizations, notably Buffer, have made all of their salaries public knowledge, many workers may still find that unappealing.
However, lockstep salaries ensure that those of us sharing the same title or years of experience are being paid the same. That knowledge can help to reduce office politics over salaries, and bring the focus of the workplace back toward the work at hand.
Popularity in Silicon Valley
Lockstep salaries are in some ways hardly new in Silicon Valley. Almost all large technology companies have a sort of lockstep salary structure, built around salary bands that depend on specific title and years of experience. While there is some potential to negotiate larger salaries, that effort is probably better spent on transitioning to faster-growing projects where title advancement will be quicker.
The more important change is happening at startups. The intense competition for workers the past few years has encouraged startups to offer almost anything to get an engineer to sign paperwork, but now there is a sense among some founders that this approach has led to unfortunate side effects.
One example is Jet, the ecommerce startup launched by Marc Lore, which uses a form of the lockstep model. Lore described his company’s system in an interview. “Everyone at the same level makes the same comp. Everyone knows that no one is getting paid more at a similar level,” he explained. “We don’t respond to offers from elsewhere, since everyone at the same level gets paid the same.”
Lore is in the vanguard of founders addressing the female pay gap. “I do think that women do get the short end of the stick that they sometimes aren’t as aggressive about negotiating comp, and I don’t think that is fair at all. Here, once they get pegged to the right level … no one can negotiate.”
That might sound like a nightmare to some zealous startup compensation negotiators, but it is well past time to consider how our current model has performed. Lockstep salaries are not just for Mad Men, but could be a model usable by very modern tech startups looking to bring more fairness to the workplace.