Salaries and Raises

A company’s approach to determining employee salary is often esoteric. Except in the case of a government job where salaries are required to be published, or one of those occasional startups that decides to be ultra-transparent, employees only have data on their own salary, and it’s often not clear how it’s determined. When I was the CTO of Braintree, I incorporated many of the ideas from Netflix to determine salaries. (Note: I am no longer involved in compensation discussions at Braintree, and the opinions here are mine, not Braintree’s.)

Determining Salary

I’ve never understood when an employee talks to his or her employer about quitting, and the employer includes a generous raise as part of a counter-proposal to stay. If the person was providing enough value to the company to deserve that compensation, and the company was willing to pay it, why weren’t they? Cynically, many companies have financial interest in keeping salaries in a lower percentile. Sadly, this seems equivalent to an employee trying to work the least amount possible while keeping their job. It’s likely not the type of relationship or culture that most companies want to have with their employees.

One of the questions that Netflix proposed helps guide salaries along these lines.

What would we pay to keep that person if they had a bigger offer elsewhere?

I tried to do this at Braintree. My goal was to never have a person ask for more money and for me to say “yes.” If people are compensated commensurate with the value they provide to the company, then there’s no need to negotiate.

I applied a similar thought process to job offers. It’s commonplace for employers to offer a salary slightly lower than they’re willing to pay, a job candidate to counter with a number that’s higher than they actually need to accept the job, and to go back-and-forth a bit before settling on a number in the middle. This negotiation process is inane, especially when it’s become the norm to the point of being predictable. Instead, I’d try to give employees the best possible offer initially. It’s sometimes difficult to determine this for new employees because their value is unproven, but it should be possible based on salary history, role, and experience.

Determining Raises

When determining raises, I’d apply the same strategy used to determine salary.

What would we pay to keep that person if they had a bigger offer elsewhere?

Offering the best possible raise helps reduce company politics. People should need to perform to earn raises, not be an expert negotiator. Again, a counter-offer from another company should rarely, if ever, prompt a raise.

In general, raises will likely be bigger the first few years that an employee is with a company than in later years. At most companies, historical context greatly increases the value that somebody provides to the company. The difference between somebody with 1 year of experience with the company and somebody with 2 years is usually large. The difference between 7 and 8 years of experience with the company is smaller. However, sometimes an initial job offer assumes the initial ramp up period, so this may not precisely be the case. General market conditions are also a factor.

If an employee was brought in at a lower salary than they currently deserve, then adjust them to where they should be. If an employee was brought in on the higher end, let them know where they’re at and set realistic expectations around opportunities for growth.

A note on actually executing the raise: don’t communicate it in terms of percentages. I’ve never heard someone say to me “if only I made 8% more per month, I could buy a new car.” I have heard people say things like “if I made another $500 per month, I could buy a new car.” People don’t generally think of their income in terms of percentages; communicate it in dollars. A percentage-based raise is likely using the wrong approach anyway, unless you calculated the percentage of increase in value provided to the company from the previous year. Raises should be more of a new job offer, based on the value that the person provides to the company after having been there a certain period of time, than a delta calculation from the previous year based on nebulous math.

At Netflix, market comp always applies: Essentially, top of market comp is re-established each year for high performing employees

Focus on value and pay employees accordingly. Invest in people, and you’ll build a team that is energetically engaged every day in making the company, culture, services, and support, exceptional.