In this episode, we discussed salary transparency. After some back and forth, we concluded that a company’s salary transparency policy should be based on its personnel strategy. In other words, how you handle salary transparency, whether it's no transparency, partial transparency or full transparency, entirely depends on the people you have and more importantly the people you want to attract.

Before you decide on a compensation strategy, you should identify the people you need to hire to execute your business plan. This includes what the job functions are and who you want to recruit. If some version of salary transparency will help you recruit and retain those people, go for it! If not, it might be best to shy away.

Tyler: So today we're going to talk about salary transparency and I mean, who knows where this will go. But, this has been on my mind recently. I recently gave a presentation to our company about how we think about salary and how people get raises and that type of thing. The question I'm posing here is, should companies tell everybody, “here's what every single person at the company makes” (full salary transparency), or should they not be transparent at all so that each person only knows their own salary. Or is there something in between? 

Rick: Yeah, so when you mentioned this is going to be the deep dive today, my initial reaction was, “I love it.” But then I started thinking about how this conversation could go and the way I look at this is that, philosophically, I believe in full transparency with most things in life, if not all things. I just don't think people can handle it. Most people are not equipped emotionally, myself included in a lot of cases, to handle the burden of transparency.

Tyler: And so when you say they can't handle it, I assume what you mean is you hear that the person next to you makes 5% more. And then it's just like in the back of your mind, like, "Well, why is that person better than me?" Or something like that?

Rick: The best way to summarize it is “ignorance is bliss”, right? And new information causes change cycles to happen. And when you go through a change cycle, you become an evil person. You become the worst person you are when you have to deal with change because it creates this fear and it brings out all these primal emotions and people do really crazy things when they have that type of change cycle.

Rick: So from a philosophical standpoint, I love it. I want all people in the world to be able to talk about all things and have a really good conversation about it and make the best decision together without emotion being a negative factor.

Tyler: Yeah. But there is emotion.

Rick: That rarely plays out when I see full transparency happening. Most people take it personally.

Tyler: Okay. So if I hear what you're saying, you're basically, it's philosophical belief versus what happens in reality and they kind of clash with each other. But there's a reality on the other side, which is even if you don't have transparency, in this day and age, can you actually keep it a secret? And if not, maybe the reality goes in the other direction where it's like, “I agree with all the problems you have, but if it's going to come out anyway, don't you want to control that message?”

Rick: So I guess the question is what do we want to accomplish as an organization and what are we trying to do? So I would say if I had my way in the world, I would go, "Let's do full transparency with everything to cash balance.” I would start there and my main goal with that is let's have full trust, number one, so that everyone knows where they stand and two, let's provide everyone context, or the same information I have as the CEO, so that people are more empowered to make the right decisions across the organization. That's the core goal with transparency for me.

Rick: Now when you start going, "Oh, well, there are all these other problems that salary transparency can solve," I'd rather talk about those problems as the topic and say, "Okay, well let's figure out how we solved that." And maybe salary transparency is a way to go about that. But when I think about salary transparency and a problem, I'm thinking about, "Okay, I'm going to increase trust with employees. I'm going to give them information to help them make better decisions."

Tyler: Maybe these are subsets of what you just said, but there's definitely an element of equity and fairness in it, which statistics say basically some people are more likely to negotiate on their behalf. And so if you don't give this information to people, what you end up with is what looks like things like a gender pay gap or a racial pay gap and things like that, which is very real, but it's really because people don't even know that they should have gone to negotiate or something like that.

Rick: Yeah, so that's a good example of a problem I would say that I would not first go to salary transparency to solve that problem because of the cons of salary transparency. In my opinion, the person who, and I'm interested in your opinion on this because you always have a different view on this type of stuff than me. My opinion is let's train the person how to talk about money confidently before we give them all the information about all the money people are making. If they aren't comfortable negotiating, what are they going to do with information that they don't even feel comfortable talking about their own information about? In other words, if they're uncomfortable talking about their own pay, imagine how their brain is going to discuss internally with themselves other people's pay relative to theirs.

Tyler: Well, it may not be that they aren't comfortable talking about their pay. It may be that they don't even know that they need to. Like they may think they're fairly paid and they're not.

Rick: Then what's the problem we're trying to solve?

Tyler: Well, the company, A, might care about fairness just for personal values, setting aside business, but B, you're sitting on a landmine when they do find out. What effectively happened is you've been underpaying them for a long time and they didn't know it.

Rick: Well, who's saying underpaid? I guess this is the philosophical question related to this problem: what is fairness and when you say someone is being underpaid, what does that mean?

Tyler: So what I'm talking about, I'll put this in very like dollars and cents capitalist terms here. If you have two people who are providing equal value to the business, they should probably be paid the same amount. But if one went and negotiated and the other one didn't even realize that they were not paid what their full market rate was, you're creating this scenario where effectively the company's kind of taking advantage of this person because they're uninformed. Now maybe they can get away with it forever and one might argue that's fine. But to my landmine comment, as soon as it comes out, and especially if it comes out and then you find out, "Oh, there's demographic trends here," that's a real bad look for the company.

Rick: I react to that as, “why does the landmine happen?” Is it because the person is going through a change cycle and they don't know how to deal with new information in a nonemotional way or is it really because they feel wronged?

Tyler: Yeah, they were wronged sort of.

Rick: How?

Tyler: The company was withholding information from them in a sense and using their ignorance as a way to pay them less than what the person deserves. And I'll add onto this.

Rick: So you keep saying deserved.

Tyler: Yeah. Yeah. So let me add onto this.

Rick: What I think you're saying is if two people are in the same role and one person is getting paid more, another person deserves to be paid the same amount in that role. Is that what you're saying?

Tyler: Well, the language I use is if they're providing equal value to the company.

Rick: But no one provides... There are no two people who provide equal value at any company.

Tyler: Right. This is a thought experiment though.

Rick: Yeah. Yeah. But that's not realistic.

Tyler: Let me add onto this also. I think I'd change my whole attitude if it's like a sales team or some job role where being a good negotiator somehow correlates with being a good employee. Then it's kind of like, "Yeah, if you didn't put the effort in to earn your own higher salary, that is suggestive that you don't deserve it." But if you're talking about programmers or customer service people, being a good negotiator's completely orthogonal, maybe even inversely correlated with being good at your job. So paying people more for having this irrelevant skill is not really how capitalism is supposed to work, I don't think.

Rick: Well, at the end of the day isn't capitalism just supply, demand and prices... what people are willing to pay to get the supply?

Tyler: Yeah, but I'm saying the business is acting irrationally. They're choosing to pay people more, not based on value provided to the business, but based on this other skill that has nothing to do with it. There's two things here. There's salary transparency. There's also just, should the business be paying people fairly whether they negotiate or not.

Rick: You keep saying fairly.

Tyler: Market rate, whatever.

Rick: Market rate for who?

Tyler: For each individual person.

Rick: Well, if someone has put effort into increasing the amount of money that they are getting paid, their market rate is higher than the person who has not.

Tyler: Their value to the business is not higher. You can define market rate in different ways.

Rick: So why would someone... So if you're telling me that someone is saying, "Hey, I'm going to pay someone a lot more because they have more value to the business," then I don't really understand the concern. Now I think what you're saying is why would you pay someone more who has less value to the business?

Tyler: Yeah, exactly.

Rick: Well, that seems really dumb. Go find someone else to do the job.

Tyler: That's what happens when you treat negotiating... This is getting away from salary transparency a little bit, but the point is salary transparency is one way to address that problem is to point out everyone can see, "Oh, the company's willing to pay more for this role."

Rick: Or you can invest in people who are the most valuable people at your company doing things and becoming better people.

Tyler: Okay, so...

Rick: And that does not require salary transparency.

Tyler: Okay, so one option here is kill salary transparency. It's totally secretive, but the company does not reward negotiations. It puts a lot of effort into actually evaluating how valuable each employee is and paying them according to the value they provide, not according to their ability to negotiate a salary. Is that what you're saying?

Rick: Yes. I do think that there is a reality, and this is probably more of a cultural decision by a company, that someone who is willing to do work at rate X should not be dissatisfied because someone else is not willing to do that work at rate X, regardless of what value they're providing. And I don't think there's anything wrong with people having different levels of willingness to work … I'm willing to do certain things for little to no money that no one would be willing to do.

Tyler: Right.

Rick: I think at the end of the day, the problem that we're bubbling up here is people who are... Do companies take advantage of certain types of people?

Tyler: Yeah. That's certainly one of the problems here.

Rick: Yeah. That's the problem.

Tyler: But that's a fairness for the employee, which you know I care about. But that's not even what I'm talking about. I'm talking about the company not doing what's right for them.

Rick: So talk to me about that.

Tyler: Yeah. People leave jobs all the time where if the company had just taken care of them, they would have stayed and they were really valuable for the company. And it's just like a Romeo and Juliet, two people who would have been perfect for each other missed each other due to some miscommunication. And a lot of this could be solved by either salary transparency or the company saying, "I don't care if we think you would do the job for X. It's worth two X, so we're going to pay you two X."

Rick: And your argument would be that the additional X is a higher ROI to the company than not paying it?

Tyler: Yeah. Because instead, that extra X is going to some other random person at the company that negotiated for a higher salary, but it's irrelevant. That has nothing to do with them actually providing value to the company.

Rick: So back to salary transparency. What is your opinion on salary transparency? I'll just state mine so you can use it as a position. Philosophically, I love it. Operationally, it doesn't work unless you have the right people on the team who can handle it and I think that it becomes unscalable at a certain number of people. I don't know what that number is, but... And I am someone who, with my last company, I was transparent with everything except salary.

Rick: That was the only thing I did not share with the company and if I did another company, I probably wouldn't share as much as I shared because I do not think that the typical company is able to scale this from an emotional standpoint.

Tyler: Yeah, I agree. We're setting aside salary specifically. Transparency in general, you need to be careful with because as the CEO, you spend all day thinking about these things and you can offhand say, "I've had this happen before." Offhand, I was just like, "Oh yeah, the partners in the business." We were talking about like what happens if I get hit by a bus. And it wasn't a big deal to me because we talked about it and figured it out and we've got a plan and over the following weeks multiple employees came up to me were like, "I'm really stressing out about what happens if you get hit by a bus." And it's like, "Okay, I shouldn't have said that. I shouldn't have mentioned that we even had that conversation."

Tyler: So I get what you're saying.

Rick: Change cycle. Fear, right?

Tyler: Absolutely. You need to massage the messaging.

Tyler: I agree with you philosophically, salary transparency is good. I agree with you it can have problems, but here's my thing. I think it's immoral to... It's like some companies tell employees you can't share salary information with each other. It has to be secretive. I don't think that's appropriate. And in a world where you don't do that, some of this information is going to get out. So I don't exactly disagree with anything you're saying. I just think it's inevitable that it will get out. So my attitude is being open with it and explaining the reasoning. Because the problem is when it does come out, people might not understand why.

Rick: I don't disagree with anything you're saying. The only thing that caught my attention is you said something was immoral. And I've been on that end of the conversation and I don't know if it's a moral issue, but I think if you have a policy at the company and you say, "Hey, we do not want people to share salary information. It is an individual relationship between the company and an employee and it is confidential," and that is the policy and that is the rule and a person can choose to work at that company or not, there's nothing moral or immoral about that. It's just a policy. Okay. You may disagree with it, but someone may have a really good reason for having that policy that can be traced back to moral issues. Let me give you one example. I never had that policy that I can remember, but I definitely would talk to employees when I would give them a raise, especially early on when I was young as a CEO. And I would say, "Listen, you're getting a raise. I can't tell you what everyone else is making. I don't feel comfortable doing that. I can tell you that not everyone is getting a raise. And I can tell you that when, if you talk about this in a way that is unthoughtful, it will make people feel bad and it will cause people angst for no good whatsoever.”

Tyler: That's very, very different from what I'm talking about though.

Rick: [That approach] takes time for me to explain, but if I'm a company that says, "Listen, I care about employees worrying about others, what other people are doing," you could make a moral argument that there's a good reason for that policy.

Tyler: You can say that about any policy.

Rick: I don't agree that it's immoral to tell people don't discuss confidential contract information with anyone.

Tyler: You could use this logic that it's just a policy and I've done mental gymnastics to convince myself it's better for other people so it's a good policy. You could use that to defend any kind of unethical business practices if you wanted to.

Rick: Why is it unethical in your opinion or immoral?

Tyler: Because companies don't own their employees. Employees are people. The amount of money they make is a huge, huge part of their life. To say this thing about you, this thing about your livelihood, it affects every day, not just at work, but when you go home, your social life, the vacations you take. This is something, a piece of information owned by the company. It's not. It's public information if they want it to be.

Rick: When you say it like that without saying immoral, I totally agree with you. I just don't think it's immoral. I don't think people are doing it because they want employees to feel bad. I think they're doing it because they think it's a good business practice that... they aren't choosing it to be unethical when they're doing it.

Tyler: Plenty of things or immoral without bad intent.

Rick: Okay. Maybe I'm stuck on the definition of moral. When you say immoral, it rubs me wrong.

Tyler: You think I'm saying the company's intentionally being evil?

Rick: Yes.

Tyler: That's not what I mean by it.

Rick: Okay.

Tyler: What I mean is the company is, whether it's intentional or not, doing something wrong.

Rick: I agree with that.

Tyler: Okay.

Rick: I agree with that. So taking a step back, I left my job six months ago, got fired, wasn't unexpected. We were going through some conversations that had been going on for a long time and tried to figure out what my role would be in the company going forward. And ultimately the role was we don't want you to have a role. So that sent me on a journey and I did a lot of reflection. One of the books I read was called “The Four Agreements”. I read a lot of spiritual books. It was an interesting time. Really healthy, highly recommend it. 

Tyler: It changed you.

Rick: I think if you do [a sabbatical] where you're doing a lot of inner reflection, you can self-improve significantly and that can lead to some really positive change. So anyway, I read the spiritual book (the Four Agreements) and basically, there's a lot of points in the book, but one of the big takeaways for me is just how domesticated we are from completely free kids to the time we become adults on our own after we graduate from college or high school, whatever it is for different people, and we have to unlearn these judgments, basically, these rules that our parents have created, that society has created. And one of those rules is that you don't talk about money.

Tyler: Yeah, absolutely.

Rick: Right. Like, it's bad to talk about money. I just remember sitting with my parents all the time around the dinner table and if I would say something like, "Hey, Johnny's dad got a new car. How much does it cost?" "We don't talk about money. It's not okay to talk about money.".

Tyler: Yeah.

Rick: But, "First of all, we can't talk about money in public, but since we're at the dinner table, it's probably about a $50,000 car." "What's $50,000?" "Well, we don't talk about this in person with other people in public, but we can talk about it here." It took me a long time as an adult to feel comfortable talking about money with other people outside of my family.

Tyler: I totally agree. But I think very strongly the reason this culture exists is because it benefits companies and they made us think this way. They made it taboo. It's empowering for workers to be able to talk about that. It creates much more of a free economy of labor. It lets people be more mobile. It lets people make more informed decisions. It would be better for people to talk about this.

Rick: The more we talk about it, the less emotional it is and it solves my problem, like the whole problem is that the salary conversation is emotional. Money conversations are emotional for a number of different reasons that we won't go into today. Maslow's hierarchy of needs, like basic, primal instincts. But if we talked about it more, I believe those conversations would be far less emotional and far more productive.

Tyler: Yeah, so I realized we probably shouldn't drag this on too much longer, but let me pivot this a little bit to something a little, that we sort of deal with here. I'm just like, I hate the whole dealing with people getting all like emotionally hurt over money stuff. So we keep it even simpler. We're just like, “not only is salary transparent, but everyone gets paid the same amount based on what your job is.”

Rick: So you are fully transparent?

Tyler: Yeah. The one exception is we've only had one person ever who was contributing so much value, it was above and beyond what our normal structure accounted for and so we told everybody...

Rick: Was his name Tyler?

Tyler: Yes, yes, I pay myself. No, no. I'm transparent about what I make though. I tell everyone that. But there's this one person who basically the compromise we struck is I said, "I'm going to tell everybody at the company this person got a raise beyond the system we have. And if he wants to share that with people he can, but I'm not going to share it because that's his information."

Tyler: That's one of the reasons salary transparency has been on my mind is because that's the balance I struck and I don't feel great about it, but it's the best I could come up with. So here's the more common thing we run into. It only works to pay everyone the same amount if you're effectively overpaying almost everyone, right? If you think about everyone's providing whatever amount of value to the company, you have to pay what the most valuable person is worth or else they'll leave. And then you have to pay everyone else that amount because you have equal salary for everybody, which effectively means some people are more overpaid than others. And there's this question of something... I've talked to a lot of people about this and some people, not people who work here, but people are just like, "That's bullshit. If I know I'm more valuable than this person next to me and I know we're making the same amount, even though I wouldn't make more, I will be unhappy that they're making as much as me."

Rick: Yeah. I mean, I've never been in a situation where I knew what other people were making around me and felt like I was putting more output and really cared about it from that perspective. I can't relate to that really. For me, it's like, I'm going to be me and I'm going to do a lot of value and I expect to be rewarded for it.

Tyler: Yeah.

Rick: I don't really care.

Tyler: But as long as you're getting enough, you don't care if someone else is even more overpaid? It's like a genuine, legitimate belief to be upset about that, I think.

Rick: So I'm trying to compare this to compensation discussions I've had personally. And everyone always goes to comps, right? Comparisons to what the industry standard is. And that is the default. And the minute you do that, I get pretty frustrated because I don't really care. I don't care what that person's making. I don't care what that person, I don't care what the standard is.

Tyler: Right. Are you making enough?

Rick: This is what the value I'm providing. Here's what I think it's worth. Make a decision. And this is what I'm willing to do the work for. Make a decision. And if you can't do that, then I can't stay here.

Tyler: Yeah. Well, and that's one of the things we decided is... I don't know what percentage? Is it 50% or 90% of people wouldn't tolerate the model I just described because they'd be upset that the janitor's making as much as they are. What we've effectively decided is, yeah, don't work here.

Rick: So it'd be interesting. So for me in that situation, it would never bother me that people were making the same amount. But if I couldn't get rewarded for my above and beyond, because “I will, I'll out-produce most people; I promise you that, employer.”

Tyler: The theory here is everyone's paid as if we're assuming everyone is outproducing like that. Now this model would not work for you. 

Rick: Talk to me about that. I think there's probably a lot of people who might listen to this and say, "I am going to outperform. What about me?"

Tyler: Yeah. So this is one of the hardest things about this decision is if it's true that you're outperforming in such an extreme way, because we, I would say, overpay everybody to some extent, but it's not more than you, someone who's been a CEO of a successful company. Like we're not paying everybody that amount of money. We're basically saying, "Yeah, we're going to lose those very, very, very top, just third deviation from the mean performers. But who says we could have gotten them anyway? Who says they would've stayed? We're building a culture around people who will be content with being really well paid but not CEO level."

Rick: That's how we solve this whole conversation. How you handle salary transparency, whether it's no transparency, partial transparency or full transparency, entirely depends on the people you have and more importantly the people you want to attract.

Tyler: Yeah, absolutely. And I'll say too, I didn't realize this originally, we kind of stepped into it, but we've shifted our attitude here and we used to say this is like we're going for a capitalist utopia and now we say we're going for a socialist utopia and that meshed really well with everybody here. But it's also when I talked to other people, they're like, "Oh, I would never want to work there. That sounds terrible."

Rick: That's great. You have a strategy for the people that you want to hire or you've identified the people you need to hire to run your business strategy and then you're designing compensation and salary strategy to attract those people. That's smart.

Tyler: So it's interesting. And then the takeaway there I think means this is not about salary transparency, yes or no. Like whatever you decide there and however you structure it has to trickle down to every part of your business, how you recruit, what the job functions are and everything else.

Rick: Totally. And I would say it the other way. I would say who you want to recruit, what the job functions are, should trickle down from the business strategy and should output a salary transparency strategy.

Tyler: Yep. Yeah. I think that makes sense. This is where I ended up naturally, but I don't think I had the language around why. So this helps me kind of have some more clarity about how to talk to this.

Rick: Yeah. And I'm realizing now that, prior to this conversation, I never would have gone to full transparency. But I could see that there's a company that I would promote this for if it fit the personnel strategy.

Tyler: Okay, cool. Well, that sounds like a good place to wrap up the podcast. So, thanks for listening, all of you zero listeners out there.