How Ending Salary Negotiations Could Boost Your Company Culture

    By | Small Business

    I’m Bhavin Parikh, the CEO of Magoosh test prep, and I don’t negotiate salaries.

    Non-negotiable salaries aren’t about selfishness and they’re not about being a greedy, money-hoarding CEO. They’re about setting a tone for your business and your relationships with employees, maintaining a culture of fairness and respect, and ultimately contributing to the well-being of your company for the long term.

    Magoosh is proof of that. Our company maintains a healthy and happy culture; we’ve had zero employee turnover in our five-year lifetime. We’ve also been quite successful with an acceptance rate of over 90 percent on more than 30 job offers. My employees and I are constantly learning, collaborating and growing together to build our company. We were even named the 2015 Happiest Company in Education by TINYpulse.

    Taking a hard stance and saying no to salary negotiation was a scary decision for me, as it would be for any founder or CEO. But ultimately, I knew our company culture would be better for it. In this article, I’ll explain why I disagree with negotiating salaries, what we do instead at Magoosh and why your company could potentially benefit from taking the same approach.

    What’s the Problem With Negotiating?

    First, let’s be clear. Negotiation in general isn’t bad. In many negotiations you can expand the pie or create win-win scenarios. However, we’re talking strictly about salary negotiation, and negotiating individual salaries can be a dangerous game.

    As a CEO, I often find myself in positions where I could negotiate salaries for a quick win, especially when it comes to starting pay. I’ve extended offers to promising candidates before, and they’ve come back to negotiate for a few thousand dollars. If I don’t budge in those situations, I risk losing the candidate and having to go through the time-consuming and expensive hiring process all over again. It would be easier (and less stressful) for me to concede. And in a growing startup, it’s easy to think: what’s a few thousand dollars per year in the grand scheme of things?

    However, even seemingly small negotiations on starting pay — or on bonuses and raises down the road — opens the door to a subjective and unfair compensation process, creating harmful long-term effects. Consider these consequences:

    • Two employees performing at the same level in the same role could end up with drastically different salaries. Not only is that unfair to one of them, but if they ever discuss salary, they’ll also feel cheated by the company and by you. Ask yourself: “Would I feel comfortable if all my employees’ salaries went public? Could I explain to one employee why they’re making less than another person in the same role?”
    • Studies have shown that men are more likely to negotiate. By opening the door for negotiation, you might also further contribute to the gender pay gap.
    • At a fundamental level, negotiation sets the wrong tone. You reinforce the belief that compensation is subjective, rather than merit-based. You reward an employee’s ability to negotiate rather than their actual contributions to the company.

    How About a Real-Life Example?

    Aaron Schwartz is the CEO of Modify Watches and a good friend of mine. A year ago, he faced a common startup issue while giving a prospective employee a job offer. Let’s call the employee Sam.

    Aaron offered Sam a range of salary and equity options to choose from. Sam seized the opportunity to negotiate and asked for a salary above the upper end of the range. Aaron, not wanting to lose Sam, agreed to the higher salary realizing it would not significantly impact his bottom line.

    Sam came away from the negotiations with a certain understanding about how he could do business with his new boss. A year later, Aaron gave him a $10,000 raise and additional equity. Sam countered again with a higher salary number, citing that he could earn more at other companies. Ultimately, Aaron and Sam parted ways.

    Sam was never a good fit for Aaron’s company: he was focused on maximizing salary while Aaron was trying to build a scrappy company where employees were passionate about learning and gaining unique business experience. But by opening up the initial salary to negotiation, Aaron had set a tone that compensation was subjective and could be negotiated. Had he held firm on his initial offer, he may have lost Sam to another company. But he lost him anyway, a year after investing in his growth. Aaron now holds firm on salary offers and communicates the other benefits of working at Modify. He has not made the same mistake again.

    How do you avoid situations like this? Set up a compensation system that forces you to be as objective as possible.

    What Does That System Look Like?

    In my opinion, your system should allow you to manage compensation — from starting salaries, to raises, to bonuses — in an objective way that’s clear to employees. Let’s call it your structured compensation framework.

    Our framework consists of three factors that help us be as objective as possible when determining salaries: individual performance, company performance and market rates.

    • Individual performance: Our managers work with their team members to set goals in several areas: competency and expertise, reliability, ownership, values and more. I’ve created guidelines in each area so that the goals are consistent for similar roles across departments. The managers then use their weekly meetings to provide feedback and coaching based on these goals. The process itself is still a work in progress, but our ultimate goal is that each employee has a clear understanding of how their individual performance leads to an increase in their salary.
    • Company performance: We’ve created targets based on revenue over the past 12 months. As we hit those targets, we provide increases in salary. These revenue milestones affect everyone in the company but have a greater impact on the salaries of those in more senior positions.
    • Market rates: My managers and I review market rates for each type of position quarterly and aim to be in the 50th percentile for similarly-sized startups. Sometimes this means that employees get raises without any change to individual or company performance. Other times we find out we’re exactly where we should be. Determining market rates can be challenging. We stay informed by talking with other founders/CEOs, using industry compensation surveys from Moz, viewing positions on Angel List and researching starting salaries at local undergraduate institutions. (Pro tip: use Angel List’s API to scrape all of their job listings.)

    No Framework Is Perfect

    There’s no easy path for creating a structured compensation framework. The system will never be perfect and will need continued refinement.

    To make sure your employees aren’t in the dark about these decisions, it’s important to have open dialogue and to communicate your framework. When an employee receives a raise, let them know which factors (individual, company, or market in our case) contributed to the increase.

    You should also welcome employees to talk with you at any time if they have issues with their pay. At Magoosh, if someone believes they aren’t being paid fairly or according to our philosophy, then we’ll consider updating the framework so that everyone benefits equally, not just the person who broached the topic. In fact, employees have talked with me about compensation quite a few times in our company’s history. Some of those conversations have led to changes in our frameworks and others haven’t, but they’ve all been productive.

    Take on the challenge and try setting up your own framework. It’s tough, but working at it will help you and your employees understand compensation in a larger context. It conveys fairness by rewarding people of equal ability the same amount and it shows employees that salaries can’t be gamed. You’ll also protect yourself from one-off negotiations with potential employees, since you’ll be bound by the framework. You may lose some candidates and employees along the way, but ultimately, your company and the employees who stick around will be better for it.

    A version of this article appeared on the author’s blog, here.

    Bhavin Parikh is CEO and co-founder of Magoosh, a company that creates web and mobile apps to help students prepare for standardized tests such as the GRE and GMAT. He loves advising startups on growing their ideas and building great cultures.

    The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

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