Ben Nadel
On User Experience (UX) Design, JavaScript, ColdFusion, Node.js, Life, and Love.
I am the chief technical officer at InVision App, Inc - a prototyping and collaboration platform for designers, built by designers. I also rock out in JavaScript and ColdFusion 24x7.
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Ben Nadel at cf.Objective() 2013 (Bloomington, MN) with:

Thoughts About Salaries And Raises As Motivated By Daniel Pink's Book, Drive

By Ben Nadel on
Tags: Life, Work

This weekend, I started reading Daniel Pink's new book, Drive: The Surprising Truth About What Motivates Us. I'm only in the middle of chapter 2, so I am sure it is way too early to draw any conclusions about anything; but, what I've read so far definitely has my mind churning. In the book, one key concept that he covers early on is the repeatedly demonstrable fact that external motivators inhibit creativity. These external motivators, which are in most cases money, take the activities about which people are most passionate and turns those activities into "jobs," subsequently turning passions into, "obligations."

As I am reading about this, I can't help but start to think about the way we, as a society, pay employees and specifically, how I, as a company owner, will pay my staff. In the traditional model - the one I have experienced myself - employees are brought on at a given salary; these salaries are then, over the years and often at regular intervals, increased with some relation to the employee's value contribution.

I assume this approach to employment works; but, as a relatively new Boss, it is my job to question this "status quo" and evaluate its effectiveness. Furthermore, I believe in the light of the studies Daniel Pink referenced in, "Drive," this question becomes even more timely and relevant.

Before I can properly formulate my philosophy on the subject matter, however, I think it is crucial that I first reflect on my own past. I'm relatively young and have a strong sense of allegiance; as such, I've only held 3 long term jobs (not including my current company).

Warning: I'm about to reflect on 15+ years of employment - who knows how accurate any of this actually is!

The first job I had was as an hourly maintenance employee at a summer tennis club. The first year, I gave it 110%! It was my first job, my first income, and my first source of independence. Not only did it afford me the ability to eat and seek entertainment without asking my parents for money, it got me thinking about the future (I actually calculated how many hours I would have to work at $5 to afford the Landrover Discovery, a $37,000 automobile, by the time I could legally drive). But more than money and independence, it gave me an opportunity to seek validation; I worked hard and I luxuriated in every single compliment my boss paid me. The day that my boss let me have the keys to the club house (such that I could work the 5AM-12PM shift) was so exhilarating, I remember having to rush home to brag to my parents about how much my boss trusted me.

The second summer, I was given a raise (I think 2 dollars). I was also taught how to re-string rackets and was given the opportunity to earn an additional $5 for each racket I restrung. With two sources of possible earnings, I very quickly figured out that if I strung a racket during normal business hours, I could make a whopping $12 an hour - $7 for the hour of work and $5 for the racket.

The feelings of independence and the pride of being a trustworthy man that I had the first summer slowly gave way to a calculating desire to "game" the system as much as possible. Of course, I was just a kid at the time, so it was much less sinister; but I was, without a doubt, starting to concentrate more on how to maximize my earnings and less so on how to most effectively benefit the tennis club and serve my employer.

I worked there for another couple of years and thankfully did not descend into all out materialism. Sure, I did things like sneak candy and soft drinks, but I always tried to be a hard worker; and no matter how much I try to sugar coat it, ever since I got that first raise, I definitely thought extensively in terms of dollars and cents.

My second job was as a summer intern at a web development company in New York City. Unlike most internships, which last a single summer, I was an intern at this company for 3 summers straight; and, despite the fact that I had been there for longer than some employees, I never graduated past the title of "intern." For pay, I made almost nothing - a few hundred dollars every two weeks (which may not have even been true the first summer). From what I recall, I made much more working maintenance at the tennis club the summers prior.

Now as odd as this might sound, even though I was making nothing on a regular basis, I was thrilled to have the job. I was learning all kinds of new, exciting stuff and, the people that I was working for were totally awesome. To this day, in fact, I still view my then-boss, Glen Lipka, as one of the most influential and forward-thinking people in my life. The other people that I reported to, Ben Peters and Spencer Spinnell also taught me a tremendous amount that has, to this day, shaped the way I work.

More than anything though, I loved how much creative energy I was able to harness at that job. I remember my boss would have me do things like sit down and read every tutorial on "HTML Goodies," or take a week or two and learn Flash. Basically, any time that he had an idea that a given technology might be useful (ie. Flash, XML, CSS, Javascript, ColdFusion, SQL, .NET, Photoshop), he would have me sit down and learn it. Of course, we had to get client work done as well, but that always felt secondary to expanding my skills.

My third and last job before I co-founded a company, was as a ColdFusion web developer - a job that I held for over 5 years, briefly rising to the position of CTO. The first year I was there, I was totally excited! Just as with my previous job, I was learning fresh, exciting approaches to problem solving techniques and styles of programming. Then, I got a raise. That was awesome! I was a single guy living in NYC in a relatively big and sunny studio apartment and for the first time ever, I was both paying my own way and saving up for the future.

Then the second year came along and I got another raise! This time, not so great. Sure the increase was good, in and of itself; but, the percentage increase was relatively lower than the increase I received the year before. I panicked. At least, that's the best term I can come up with to describe it. I talked to my bosses and stressed that the increase in wages had to be maintained otherwise how could I ever feel safe in the context of an ever-increasing cost of living?

It was not my finest moment. To this day, I feel ashamed of how I presented myself. Rather than enjoying the fact that I was in a great place in my life, learning a lot, and generally loving what I was doing, I concentrated on my relative wage increases and how artificially important I was making them.

Over the next few years, I felt myself concentrating too much on the financial aspects of work. Each raise and bonus became a comparison of the year before. Ever tiny change seemed monumental - my bonus was "under the table" last year and "on the books" this year! Great - now I have to pay taxes on it; now with taxes taken out, it's much less than it was last year; now it's blah blah blah.

I don't want to paint a bad picture of the company; I'm a much more talented developer today than I was years ago thanks to the time I spent working there. And, financially speaking, I was doing great; I was living well, maxing out my personal retirement account, contributing to my 401k, and still putting money aside for a rainy day. So while I found myself getting irritated, and even at times depressed, I really didn't have a whole lot to complain about.

So that's my employment history in a few paragraphs. As far as how money, and the increasing of it over time, influences people, I respect that a sample size of one (me) doesn't lend well to statistically significant results; but, now that I have taken this time to reflected on my own employment history, what insight have I gained?

Well, at a personal level, I see that I have at times behaved inappropriately and in a way that is embarrassing. But, I would like to learn from those moments and improve my mentality for the future.

At a superficial level, I seemed to be happiest at the job that fostered my creativity while paying me very little and in such a way that was no reflection of the value I added to the company. Furthermore, I seemed to be happiest at the one company at which I don't remember ever getting a raise.

This is all well and good, but in reality, people need to earn a living and they can't spend the entire day doing research and expanding their skill set. So, in a world where employees have families to support and clients to please, how do payment and payment-increase strategies figure into the picture?

I think there's a finite set of strategies available; so let's outline them and then evaluate them individually:

  1. Give someone an hourly wage.
  2. Give someone a low base salary. Then provide some increase each year.
  3. Give someone a low base salary. Then keep that the same every year.
  4. Give someone a high base salary. Then provide some increase each year.
  5. Give someone a high base salary. Then keep that the same every year.

I have not provided any variations on a hourly wages as I think they are fundamentally different than salaried wages, regardless of actual amount. Keep in mind that we are talking about full-time employees, not part-time, contract workers.

Give someone an hourly wage.

From my personal experience, I know that having an hourly wage definitely made me focus on maximizing my earning without regard to my creativity or job satisfaction. In fact, my only real sense of job satisfaction became a reflection of how much money I made. As a young boy with his first job doing not much more than manual labor, I don't think this was too much of an issue; but, as an adult facing some 40 more years of employment, I suspect job satisfaction and creativity will necessarily become more paramount.

Furthermore, drawing on what Daniel Pink seems to be getting at in his book, an hourly wage is most tangible form of external motivation; and as such, I assume it will actively inhibitted both creativity and motivation.

Give someone a low base salary. Then provide some increase each year.

This is the typical model of payment that I see (although perhaps this is shifting a bit in the age of outsourcing). While it might seem to be the most logical, speaking from my own experience, any deviation in this yearly increase (in a downward direction) might lead to mental stress and the questioning of one's own abilities (as in, what mistakes did I make this year that warranted less reward?).

Give someone a low base salary. Then keep that the same every year.

In my own experience, this style of payment seems to have led to the most happiness; of course, at that point in my life, I had no bills and no responsibilities. As such, I can't say that this method is practical in any sense. Plus, there is something in my gut that prevents me from being comfortable paying someone a low salary regardless of their value.

Give someone a high base salary. Then provide some increase each year.

While starting a higher salary might seem like a well intended solution, I fear that the yearly increase may lead to the same negative reaction, regardless of the increased starting point.

Give someone a high base salary. Then keep that the same every year.

This, to me, is the most intriguing strategy so far. By giving someone a large base salary, perhaps even one that is not warranted up front, the increase cost of living becomes a non-issue - at least for a few years. Then, the constant salary from year to year prevents any negative reaction to fluctuations in salary increase. I think this combination would be quite conducive to creativity, motivation, and general satisfaction; but, is paying someone a large salary up front even feasible?

I want to explore this strategy a bit more as a thought experiment. Would I be happy making a million dollars a year if that were to stay the same for the rest of my life? Assuming that the cost of living didn't go above that, I imagine that I'd be totally fine with the constancy. And, considering that the money never changed, I think I would be inclined to see it as incidental, rather than as an external motivator.

What about $500,000 a year? What about $200,000? $100,000? $50,000? As the number gets lower, I get nervous; and that nervousness is based completely on my standard of living. I ask myself, Can I live on X dollars a year? While this makes practical sense, the one question that I am not asking myself might be even more meaningful. As I think about this number and its decline, at no point do I ask myself, Am I worth X dollars a year?

I assume that because the payment would be static, it is never bound to my sense of worth. As such, I never see it as an external motivator. And, if I never seen the it as external motivator, it would follow that the salary would never have a dulling effect on my motivation and creativity; and, in fact, if I think back on my second job as a summer intern, this is, indeed, the case.

This little thought experiment then begs the question: Which is more relevant - the static salary or, the complete detachment of it from my performance? My gut tells me that it's the detachment from performance that "frees" me from having to worry about my salary. If the two were not linked at all, then presumably, my salary could be increased without it having a detrimental effect; it would become something of an incidental benefit rather than an external motivation.

With this reframing of the root cause of the detrimental effect precipitated by the value-add / compensation bond, is there perhaps a way to bring back a more traditional payment model without the negative side effects? Maybe there is. Right now, increases in ones salary are very ceremonial actions; maybe you have a formal review at the end of the year where you and your boss discuss the pros and cons of your behavior over the last 12 months. The result of this formal review is then a highly anticipated (and much hoped for) salary increase.

But, what if the ceremony of this action was removed? What if salary increases where applied randomly over time? What if no one told you that you got a raise and you just happened to notice that your pay check was a bit higher than it was last month? Would this approach to salary increases allow raises to be applied without them feeling like they were directly tied to your performance? Would the randomness of the raises remove any expectation of them?

At this point, I don't have any answers (sorry if you read this far hoping to find some); but, I do have some new and provoking thoughts that I think will frame the rest of Daniel Pink's book in a very interesting light. Hopefully, Pink will have shed some great insight on these matters by the end of his book and I'll be able to share those with you.


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Reader Comments

I've actually never had a job where I've had 1. A pay increase and 2. A bonus! This may sound odd in today's world but I've spent a lot of time working for very small businesses and money is always tight. I try to get myself a decent base salary though. It would be nice once in a while to get something extra, without the expectation of it. I think working in bigger businesses you would tend to expect pay increases/bonuses because of the corporate culture that has been set forth so far. Working in small businesses though it is often hard to justify either (far less both) so you suck it up and do your job.

For me, it would be nice to anonymously get something in my pay rather than looking out for it and being disappointed.

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I'll have to get and read this book as I found your post fascinating so far.

We're going to be in a position soon to have to hire help. I'd say within 3-6 months. And I have been chewing and chewing on the employee versus contractor scenario.

Problem with an employee based company, besides the paperwork, is training and keeping said employee. Knowing what truly drives someone to do a great job AND stay is probably paramount to a company's success.

As a contractor, whilst you would want to retain a really good contractor as long as humanly possible, there's no real incentive for someone to stay as a 1099 "worker" unless they are exactly like me, totally independent and extremely happy to stay that way.

I'm extremely interested in your follow up to this post and what your overall findings and conclusion may be.

Are you done yet?! ;) :)

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One issue to consider is that there is competition for employees as well as competition for jobs. There are market forces both ways that fudge up the negotiations between employer and employee.

That said, perks really make a huge difference after job security and pay. I love having challenges and new systems to learn. A creative and comfortable environment at work can be more important than another $5k in annual pay. Job security is also a huge factor for many people.

Salary definitely is a motivator. This is especially true through mid life when you may be paying for college expenses or raising kids. Someone may trade more money or time depending on their personal issues.

At my age (probably around your parents age,) I am looking at old age coming up fast. Older workers probably have more interest in retirement benefits than younger workers who see as far away.

Thanks for the report on the book. I may take a look at it.

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On a more humerous note: I feel like these salary models could be well simulated in a new flavor of The Sims. (I tend wish that scenarios like youve proposed, with no obvious right or wrong, could be easily simulated to find our which answers are better...)

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One model I saw was a low base salary with possible annual increases, but also with a bonus tied to sales revenue. Basically the bonus was a significant percentage of profit, resulting in a bonus of around 20% of salary. It seems this would motivate the employee to put out the best product that will yield the most sales. Not a bad way to go.

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I love the bonus model. That's our initial lean at the moment, for either contractor or employee based situation.

A decent base salary and then bonuses as the business continues to thrive.

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Ben, I found your site while looking up jQuery info. You write very well and I look forward to going through your archive and future installments in your thinking process/blog. I also have begun to follow your Twitter account. (Do you feel like a bundle of money with googlie-eyes is watching you now? :)

The last compensation model you list - setting and keeping a high base salary - is interesting to me. I work for Florida DOT as a contracted hourly employee and make very little compared to my peers who are hired on as state employees. My ability to increase my pay is hindered by the fact that I have hit the cap that my the consultant company is willing to pay for my position. But, as you mention, my desire to do well has not diminished over time. I, like you were, am enjoying learning so much that the lack of a raise is inconsequential to the fact that I work with some really great people and am building an impressive set of skills as a C#/SharePoint developer. Only my need to make more money for my family (I have 4 children and two child-support payments) has made my own situation less than tenable. I MUST make more money if I am to feel better within my current life profile.

It makes me nervous to consider that I will make the same amount where I am at and will not earn more without disrupting my comfort zone. If I try to move in this economy will I lose the ability to support my family? Gaining a career-service position with the state is a great option because it will allow me to stay within the team I am in and begin to put away for retirement, etc. but those positions are few and far between. Apparently, I am not the only person worried about changing jobs around here!

Were I to make a high wage, unconcerned with raises, that would put me exactly where I am today and still allow me to focus on being an ever-important arm of the team. I am happy, as is my employer, with my current output. I will do better and my worth will continue to rise, yet my wage will not. Should that lead to dissatisfaction with my sense of self-worth? Not if we are discussing in the personal sense. However, if we are speaking in terms of my financial self-worth...I don't think I'll self-destruct but I can't maintain this forever!

I look forward to you posting more about what you learn from Mr. Pink. Perhaps you may shed some light on my own situation and I'll gain a bigger view of my circumstances and a possible direction.

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Thanks, Ben. Funny story, I've recently had a very similar reflection in my own professional life. At the moment I'm in a position where I may have expected a little more and was actually a little disappointed when the offer came up on the table. I've used salary as a a stepladder, expecting each rung to get me to the next. The reality is, I'm in a place where you can't put a price on the experiences and opportunities my current employer offers me. Looking back to that interview, I feel a little embarrassed of how I felt, and am glad that I didn't let something so petty make me miss out on the amazing ride I've been on.

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Interesting post Ben. If possible #5 is the way to go. The best programmers are generally creative people and they perform best when comfortable and motivated on a more holistic level. Other factors will also shape this like having monthly one-on-ones instead of annual reviews.

Watch this fantastic video by Dan Pink:

http://www.ted.com/talks/dan_pink_on_motivation.html

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Just wanted to comment on the option of random salary increases. I used to work for a small business and occasionally the owner/boss would call me into his office (without any emotion positive or negative) and say, "We've increased your salary, you should see it on your next paycheck." Never would they say the difference or why (other than "thanks for the good work"). I ultimately enjoyed the randomness, but in life-planning it was very difficult and sometimes confusing.

As someone who has spent some time researching salaries and payment methods, I think the best initial approach is to be competitive. Knowing what your competitors (large and small) are paying is a great position for you to justify any method.

Good luck in your quest and I hope to hear more on this topic.

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I'm not a very money-centric person. Most of the time I've taken a significantly lower pay to work in a better environment, or do something new and challenging, or whatever.

If I've learned one thing about salary it's this: if the employer low-balls you on salary, it's not some place you want to work. I find that attitude is indicative of how the employer will continue to treat their employees, as it speaks volumes about what they think of their employees -- as unintelligent, replaceable drones.

A salary should speak to the employee's worth, not to the employer's budget.

Now that's not to say that every company will throw money at you. A budget is still a budget, and companies have to make money to stay in business. But an employer that can't afford the money and yet still respects and appreciates their employees will make that known in other ways. Money isn't everything.

As for raises, I agree with your closing sentiment about removing the ceremony. There's nothing more disincentivizing than annual reviews and raises. No sane person would work their butts off for an entire year hoping for a better percentage increase once each year.

That, and it just seems like putting the cart before the horse.

Wouldn't it make more sense to give the person a raise before they ask for it, and at the same time say "we're giving you this extra cash because you do great work, but we'd like to see these extra things from you"? At that point, you're recognizing their contribution, you're providing a clear path to attain future goals, and you're motivating the employee to stay interested in their job. It also makes it easy to weed out the people that are only there for the paycheck -- do they rise to the challenge or not?

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@Donnie,

Regardless of the environment (big office culture or otherwise), I think it's human nature to turn bonuses into "expectations" that are easily crushed. As such, I'm quite intrigued by the random-increase idea. Best of luck to you!

@Erika,

I am in somewhat the same boat as you; we run a relatively new company and we are always thinking about the employment style we want to use. I have an emotional tie to "salary" because I still think of companies as "communities;" however, I think perhaps that is looked down up on as more old-school these days.

I'm really looking forward to seeing what more the book has to offer.

@Roger,

There's no doubt that money is an issue; and, the cost of living is a very real and powerful issue. The longer you are alive and the more responsibilities you have (kids, loans, mortgages, etc.), the more powerful that force is.

The question then becomes: how can a company keep up with that in a way that keeps a divide between the intrinsic motivation of being created and the earning of money. That's where I like the random distribution of non-ceremonial wage increases might be the sweet spot.

@Jared,

That would be awesome; however, the obivous, "wealth maximizing" behavior that we would expect from people (what Daniel Pink terms "Motivation 2.0") is turning out to be less accurate as it doesn't take human emotion into the picture. "Motivation 2.1" (as I think he terms it), is a wealth maximizing outlook in the context of emotions and intrinsic pleasure.... it gets hairy.

It would be awesome to be able to simulate this stuff; but, I think they are only recently starting to look at this as a real behavioral trend.

@Mark,

Commission is an interesting thing. I have never worked in a commission-based world. I was a personal trainer for a while, and I guess I sort of got a commission for each "session" I led; but, it was a fixed value, so I am not sure that really is the same.

What might be a good instance of commission? Perhaps a car salesman?

This is definitely an interesting idea; I wonder if Daniel Pink will touch on this at all.

@Matt W,

Tying things to a sales revenue is also an interesting approach because it creates one step of removal from the actual work. Meaning, you don't get a bonus for your work directly - you get it if your work causes something else to happen (better sales).

I wonder if this one-step would be enough to remove the emotional bond between the bonus and your work. Very interesting.

@Kristopher,

I think you are speaking exactly to two of my points - one is that the static salary can be very satisfying; but, two, that people have a very real requirement for money and the general cost of living. To this extent, I hope I can learn more from the book as to how to satisfy both of these, at least at some level.

@Matt H,

I'm right there with you; money makes us (as people) act out of sorts from time to time. I'm glad that your situation turned out well.

@Sam,

Awesome! I didn't realize that he had any TED talks. I'll be watching that immediately ;)

@Brandon,

Life planning is definitely an issue that I have considered (although I didn't touch on it in the post). It's good to hear, however, that your found the randomness emotionally satisfying.

@Rick,

I can empathize with what you are saying; I think most creative types would often select a more creative, supportive environment at the sacrifice of money. I think the other comments we are seeing here speak to that.

I agree with you regarding an employer that will low-ball you. I certainly hope to never be that kind of employer (if I can financially help it). One thing that I also don't want to do is start off at a lower salary with the mentality, "If I don't start low now, I can't give a raise later." Like you are saying, I want the salary to be a reflection of the value of the person being hired - not of my long-term stick-and-carrot strategy.

Removing the ceremony of the raise I think would go a long way to get a best of both worlds approach.

@Joel,

That sounds very interesting. I'll definitely be checking that out.

... thanks all for your feedback; I'll definitely be posting here as I listen to the book.

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Ben,

There is another factor in all of this that I dont see discussed very much. The discussion so far is "transactional" - I pay you for services rendered. The question is how much and in what form.

I will make an assumption here: That in your mind you are building a consultancy business that will grow over time. You probably have a dream about what it might look like in 5 or 10 years. Included in that dream is probably the idea that you have clients banging on your door because the great service you give and the wonderful, talented employees you have (not to mention the boss!)

Forgive my blunt question, this is not a judgement about you - I have no idea what you are thinking in this regard: Where do your employees as individual human beings fit into your dream? Are these people part of the dream or are they a unit of production? Have you asked your team how they would like to organise the business? Shared the P&L and asked as a group how much they think they should be paid based on the last 6 or 12 months successes?

This might sound like heresy but the places that I have worked where this team approach to building a shared dream were the most successful and functional places to work.

Another book you might like to track down is "Maverick" - Ricardo Semler http://en.wikipedia.org/wiki/Ricardo_Semler) He was an industrialist who rescued a dying company by (amongst many other things) letting the workers work out how much they should be paid given the knowledge about how much the company was earning.

When the boss can put his/her "ego self" aside and allow the creative energy of the team to shine through the whole is definately greater than the sum of the parts and your dream may well manifest much faster than you thought.

Thank you for being open in sharing and listening.

Murray

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I'm going to really have to take my time to read and munch over this. My goal this year is, to get some kind of salary, any kind of salary, coming in this year.

There's one factor that you've forgotten to consider - what if there is an interruption in the career path due to layoffs? The salary path gets interrupted, of course. And the longer the person is off the market shelf, the harder it is going to be to get back on the salary path, especially if one wants to stay in the same field (and this is tied to skill maintenance, of course).

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It seems like some of this gets to how much you want to tie pay to performance. This could be viewed as a sliding scale. Static salaries are on one end of the scale (no merit increases) with work-based pay (or self-employment) at the other.

Work-based pay could be pay per racket, or commission per sale, or pay per any unit of work completed. I prefer to charge per project and pay subcontractors per project. This nicely rewards the behavior you want.

The drawback here is that the incentives must very closely match the behavior that you want and it encourages effort only towards pay (be wary that workers may ignore any activity not directly related to pay).

See also:
http://www.psychwiki.com/wiki/The_Overjustification_Effect

Pay that doesn't tie at all to performance sounds good, but also smacks a bit of communism - inasmuch as it risks failing to acknowledge that people (as a group, if not as individuals) tend to act in a self-interested manner. If you feel that your performance will be above average, you might prefer to work where your performance will be rewarded. If your quality of work doesn't impact pay then you might choose to work on what you find interesting, rather than what most benefits the company.

I suspect many people who decide to work for themselves are wanting to move very far to the other end of the spectrum from salary - they want to bet on themselves.

I'm not sure my thoughts lend themselves to an answer except to the extent that thinking about where you want to fall on this spectrum could be helpful.

I'm very interested to see what else your book has to say about the subject. It sounds interesting.

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@Joel C,

I just took a look at the Joel on Software salary method; very interesting. I think I kind of like it, despite that I was depressed on how my own personal "years of experience" and "skill level" do not match his outline. With the years of programming I have, I should have exposure to a good number of platforms and be leading specialists... far from the truth!

@Murray,

As far as where my employees would fit into the big picture, I want them to be a large part of it. If possible, I never want to think of employees as just people who get work done; rather, I want them to be part of a team or even a family; I want them to be people I am excited to be working with.

At the end of the day, I want to take care of them, which is why the notion of keeping salaries artificially low seems like a poisonous idea.

As far as asking the employees how they want the company to be organized, I am not sure that would work as I think people are not deeply aware of what would actually work best for them. Look at me - I've been an employee for 10 years and I am only just now starting to think at a deeper level about what kind of company dynamics would be the most constructive.

Certainly, however, I would be more than happy to hear feedback from them.

@Lola,

I wish you the best of luck getting back into the game!

@Steve,

I agree with you that not paying based on merit just feels wrong to some degree. Deep down inside, I believe that people should be rewarded for the work they do and that those that don't work as hard probably shouldn't be rewarded as much.

If you look at the link @Joel posted from Joel Spolsky, this might be a nice compromise - it rewards people based on their skill, not necessarily their work. This is actually kind of genius because it rewards motivation itself (learning), rather than the product of motivation (more work output).... I wonder if this is enough of a congnitive separation to prevent inhibiting the motivation.

As far as contractors go, however, that's a totally different ballgame. You can't "invest" (time, training, growing, etc.) in a contractor the way you can in a staff employee. As such, I think the rules will necessarily be different.

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@Steve

>Pay that doesn't tie at all to performance sounds good, but also smacks a bit of communism - inasmuch as it risks failing to acknowledge that people (as a group, if not as individuals) tend to act in a self-interested manner.

Yep. And it is also true that in a small group (size being a critical factor) where everyone knows each other (like a small business) people are rewarded by the group for "cheater detection". So, there are lots of example where when the group has all the information on which to make decisions, the collective can (and does) make optimal decisions for the collective, "cheaters" fall into line, and people often put aside their self-interest in favour of the collective for the longer term.

So, it CAN work, as long as the environment is set up for that purpose (eg a small number of people involved, making sure everyone has all the information (P&L, Balance sheet, how much everyone else is earning (including the "boss"), etc)

I work in an environment like that right now. I wouldnt want to work anywhere else because of that philosophical and practical approach.

Murray

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@Ben

>As far as asking the employees how they want the company to be organized, I am not sure that would work as I think people are not deeply aware of what would actually work best for them. Look at me - I've been an employee for 10 years and I am only just now starting to think at a deeper level about what kind of company dynamics would be the most constructive.

You might be surprised. What if someone had included you in such a process in the past?

We use a process called "WIAL Action Learning" (http://www.wial.org/actionLearning.shtml#overview) which is fantastic way to have that conversation with the group. We use it within our organisation and with our clients. If you want to know more I am happy to go into more detail.

Using the AL process you might ask the question of the group: "How can we organise our remuneration to best achieve our organisational and personal needs?"

Murray

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@Sam,

That's a good TED talk; I think he uses that talk, almost verbatim, in the beginning of the Drive book. Looks like Drive is the culmination of his thinking.

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Personally, I think somewhat consistent raises create a climate of mutual appreciation and shared prosperity, and put a positive spin on the future. When I have the sense, specific or not, that I'll be making more next year than this one, it feels like my employer values my contributions, and cares enough about me to make my life concretely better in return. Most of all, it feels like tomorrow will be better than today, at least in financial terms.

If company patterns don't give me that expectation, I feel less upbeat about my economic future, and that I'd have to look elsewhere to improve it. Every year I don't get at least a cost of living increase, I'm making less in real dollars than the year before. If my employer doesn't think I'm worth more than that, it's hard to feel good about myself as a professional, not to mention make forward progress in areas of my life that require money.

At minimum, part of me thinks a person who believed in themselves and their worth wouldn't settle for that. I honestly don't think that's how any employer wants their employees to feel, if only for the sake of their productivity and longevity with the company.

What if the day to day work or the company mission is your deep-most fulfilling passion? Should you get paid *less* for being that involved, or given less of an upwards-and-to-the-right trajectory? You might care less about financials when you're single, childless, and 22, but those circumstances eventually change for most people.

(That's all assuming the company has sufficient resources. If they're just barely hanging on, they need to talk with empoyees about the situation, tighten belts in unison, and maybe talk up how it'll be on a better day. If it's an underfunded startup, hopefully you're all swinging for the fences together, equity in hand, eyes wide open.)

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This is certainly a popular post! I guess you know how to strike a nerve...

The one thing that popped into my head while reading this was something from Psych-101: variable reinforcement. Supposedly the most effective means of motivation is variable reinforcement; a.k.a. gambling...
So, your idea of giving out raises randomly (or, say, as they are earned) instead of religiously would probably be very effective. Imagine employees working their hearts out every day and loving what they do because they might get a kick in pay at the next cycle.

Another thing that merits note is that there is such a thing as positive and negative motivators. I realize that you (and the commenters) hit on that pretty well. But, let's say your employees made a little bit less than their peers but you had a 4-star cafe serving up free meals. That kind of thing is harder to quantify but definitely makes an impact.

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In one of my MBA class, we read an article from Harvard Business Review, "Why Incentive Plans Cannot Work" by Alfie Kohn which covered similar concepts. At first I didn't agreed with Kahn interpretation that typical incentives are extrinsic with limited life. However after few class discussion - as you can imagine how lively this topic can become - I started to some what believe in what Kahn said.

Here is a link to the article

http://fiveandone.wikispaces.com/file/view/Why+Incentive+Plans+Cannot+Work.pdf

Great blog post as always Ben....

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@Erika, as a contractor I do have incentives to stay. It's not just about a gig to fill time nor just the money. I'm working with people with whom I've built a relationship. I know how to work with them. I also may like the working environment. Or I may like the things we're working on in it. For example, doing a re-write of an application using FW/1 would be really cool. A gig where I'm just churning out bug fixes and band-aid enhancements for a spaghetti code app... not so interesting.

In fact, I'll throw this out there to stir the pot. I wouldn't claim this is entirely true nor would I normally phrase it this way but, eh, let's get things stirred up. :)

Full time employees only stick around because they're too afraid to do new things and lack the skills to be sought after in the job market (because they don't do new things!).

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@Allen Graetz,

I wont lump all full-time employees in this group, but I agree with you wholeheartedly about why some of them may stick around boring jobs.

But that is true of every industry.

Life, family pressure, debt, all of those have a bearing on what most people can psychologically handle when building a career.

We're not all made of the same strengths to handle pressure AND take a leap of faith into the unknown.

So the security (as much security as any job has these days) of a constant paycheck is way too alluring to most.

As for being a contractor that would stay because the work is cool, that's awesome. :) All of my current clients have been with me at least 4 years or more up to 10+ years with a few. I value that the most. I consider them part of an extended family.

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I think the most important thing is to identify programmers who are talented, experienced, and interested in doing a good job - if you can find those its well worth paying a bit above the odds as they should produce a lot more than average.

Once someone feels they are well paid the biggest remaining factors are environmental - can you create a working environment which stimulates employees, does not have too much burocracy, and at the same time keeps everyone focused on producing code.

I think a small development shop has a lot of advantages over a large company here as the large companies have so much crazy burocracy and rules.

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One thing I want to say, and this would touched on in the further reading that I did last night in Drive, is that money is important. Daniel Pink defines two types of people:

Type X: Those who concentrate on eXternal motivators (ie. money, rewards).

Type I: Those who concentrate on Internal motivators (ie. the intrinsic motivation of creativity and good work).

Now, what he wanted to clarify was that BOTH of these people value money. In fact, neither of them would desire to work below what they felt they were *worth* (although I think the Type I would be more likely to make some sacrifices, specially given some of the comments in this post).

The difference between the two groups - Type X and Type I - is that the Type I group discusses wages so as to finalize them and get them *out* of the conversation. For the Type X, on the otherhand, the wages *are* the conversation.

Both groups require money; but they differ in how they proceed once money has been discussed.

Also, in the book last night, Daniel discussed that rewards can be used effectively, sometimes. Typically, people talk about If-Then rewards. Meaning, IF you do this, THEN you'll get that. This is absolutely the wrong type of reward to have and is what has been shown to backfire over and over again.

The other kind of reward is the Now-That rewards. Meaning, NOW that that was so successful, THAT deserves a reward.

The difference here is that the IF-THAT reward becomes an expectation where as the NOW-THAT reward is unexpected. Of course, Pink warns that use the NOW-THAT reward too often and it will become an expectation, losing all of its value.

@Randomwhirr,

I think we have to work on the assumption here that a company who doesn't want to negate creativity will also be one that compensates their employees based on value; as such, I would hope your cost of living and everything else would be taken into account.

I don't think it is assumed, nor desired, that a person should make less just because they are happy doing what they are doing; I think that's old-school thinking (how can I best leverage this person as a tool) and the kind of mentality I think we're trying to curb to some degree.

@Matt,

I think the variable reinforcment approach is going to be key in some way as it will prevent a mental connection between the work and the reward.

@Qasim,

Cool, I'll check it out.

@Diarmuid,

I think that's the right point - good pay can / should be used to get people in the door; but once they are in, you have to make sure the environment keeps them happy and motivated.

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Another thing Daniel Pink talked about last night was this idea of a company using a ROWE strategy. ROWE stands for:

Results
Only
Work
Environment

The idea here being that the only thing that matters is RESULTS. No business hours, no required meetings, no set work week, no dress code; as long as you get the work done, all is good.

This is one of those ideas that has been demonstrates to work well (he has case studies in the book), but I just can't see how that could work for ME!

I do a lot of creative work and it's not in a bubble. I depend on other people and they depend on me. To say that results are the only thing that matters and I wouldn't even know where or how to begin my day.

... of course, now we're just spinning off into a discussion about the book - not necessarily about compensation and raises. Sorry :)

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@Ben . . . ROW sounds nice in theory, but it just doesn't sound very structured. I suppose it would have to depend on the right blend of personalities at said company. Too many things could go awry. And then there are the clients - some may get really nervous about dealing with a company that doesn't have a set business hour. What happens when there is a "melt down, boiling point" emergency?

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As usual Ben, Great insight.

I have found that profit sharing can be a great motivator that ties employees choices directly to What is Best for the company. Even if the $ amount is small, it's the ability to have an impact that can make a difference.

I have also seen it first hand turn into resentment and infighting when decisions by management or other employees are effecting profits negatively. I think that combining general profit sharing and personal/team bonuses as a small portion of total compensation is the best approach. Of cousre everyone is different and customizing the approach to the employee could be an option as well.

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@Matt H

>turn into resentment and infighting when decisions by management or other employees are effecting profits negatively

Yes, that can happen where the decision are not collectively made. If you share the profits (or some of them) you need to also be prepared and able to share the decision making.

And, where someone is "letting the team down" in some way or other, the team needs to have the skills to have the necessary learning conversation to understand why they are acting the way they are.

See "Clear Leadership" - Gervase Bushe for more (http://www.clearleadership.com/). This is one of the most important (indeed essential) books for any leader to read (IMJ).

Being a business owner is one of the greatest paths to self-discovery - if one is prepared to see it that way and have a commitment to personal development.

Murray

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1: In my experience raises that are given w/o asking are generally more appreciated, because on top of the raise it is an indication of appreciation and gratitude, they don't feel like they have to beg/demand what they are worth.

2: I think that anytime you can't deliver an expected raise/bonus that if possible explaining the situation can help avoid them feeling under appreciated, of course you have to balance that with not hurting morale or causing fear/uncertainty about the stability of the company.

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@Ben.. when I was reading this post (which I enjoyed really) I couldn't avoid to think about my previous jobs. And
about how my perception about salary has changed overall the past years when I've been an employee and even more an employer,
(which are very different points of view). At this time for me salary is the way I can have a living, it's the way I can afford
the things that I need to live by. And I must say that some important things in Mexico's economy are not equally important
from your economy's Country perspective. now I'm working on a small company and most of us are single and no kids family which I
see as an easier state than when you have kids and have to think about cover their needs. Then I started
to think about what are the motivations that we have? besides salary. How can someone as an
employee could feel well valuable for the company?. For me I must say that I feel my salary a lot under
the level that I would be feel more comfortable, but due to the lack of opportunities that
lately we have in the place I live you don't have so much to choose. But I must say too that now more than
before I feel motivated not because of salary but because of the feeling that I'm learning and achieving little
goals at the things that i do here.
For me this has been a key part: feeling that I'm not static. But what about the salary?. Does salary affect
your productivity or your creativity. I definitely think it does. I can't imagine a productive employee
whose mind is thinking about how is he going to afford the bills he has to pay next week. because his salary
is not enough to pay the rent. So I think extra commissions for an extra effort you're doing as an employee
could be a good way to have a reward in the short term. And definitely a yearly increase would be the perfect combination.
I'll keep looking for the next post to see what more this book you're reading tells about. Thanks a lot for sharing!

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@Lola,

Yeah, it really is very unstructured. I think it's important to point out (and I had this conversation with someone else last night who brought this point up), the companies Daniel Pink talks about are mostly "Product" companies; meaning, these are companies that build and sell products. This is a *very* different environment than "Consulting" companies (like mine) where our product is the work we do for other people. As such, there are way more deadlines and constraints and requirements for collaboration. I am not sure that ROWE can even work in a Consulting environment.

@Matt H,

I like the idea of profit sharing. I've never had it first hand, so I can't really say what kind of contempt it may or may not breed. But, I like that it does, again, separate the work from the reward by a few degrees.

@David,

I agree re: the explaining things. In my experience companies keep things VERY hush-hush and for no apparent reason. At the end of the day, employee talk to one another. I think it's especially crazy for a company to tell one or two people something and expect it NOT to spread. Might as well come out and just be honest.

@Gabriela,

I'm glad to hear that you're happy now that you are learning; and remember, the goal here is NOT to figure out how we can pay people less; that is and hopefully *never* will be my intention. My goal in this exploration is to think deeply about how we can pay people (and hopefully increase their pay over time) in a way that doesn't fall pray to the IF-THEN style reward context that has been shown to break motivation over time.

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Compensation, motivation and retention are ideas I have contemplated quite a bit lately both as an employee and in plans to be an employer.

Salary is important, but I think that one can get out of a death spiral of increase and want by providing a competitive base and then work on improving lifestyle.

Lifestyle is about work and off-time. This is a comfortable working environment, company car, company provided laundry services, day care, box seats, etc. The idea is to remove, to the extent possible, the hassles of living so that the creative employee only has to think about projects and fun.

It is something of the Google model where the job represents not projects, tasks and compensation, but quality of life and personal identification. It is impractical to think that we can all be Google (damn, I wish I were Google), with the casual availability of cars and chef prepared lunches, but these concepts can be applied on a smaller scale.

That said, Ben, you should really look at the CashFlow games based on the teachings of Robert Kiyosaki. They do an effective job of demonstrating how lifestyle improvements really can handicap your personal economy.

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@Ben.. thanks for your comments, and of course the point is not to figure out how to pay less but how to pay in the way that feels better for the employee in order to make him feel well valued. About that I agree with Matt, profit sharing could be a good motivator combined with some small bonus. The profit sharing could be also a good way to involve the employee with the profits that the company could earn in the short and long term.

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So I finished the book this morning and Daniel Pink did tough upon the salary stuff a bit more towards the end. In order to remove the destructive aspects of salary, the idea is to get it off the table, out of the conversation, so that the employee can concentrate on the job and the projects and being creative (letting motivation come from within).

But, how to do that? He suggested doing, at the least, these:

1. Be internally and externally fair.

External fairness meaning, pay people what the "industry" says is appropriate for someone providing whatever value they provide. So, if you're a software developer, pay people what a software developer makes.

Internal fairness meaning, pay people who contribute the same value in the company the same thing. The second you find out that "Bob" does the same job you do, but gets paid MORE, suddenly, the whole context is shifting back onto money and away from creativity.

... This touches nicely on the Joel Spolsky way of paying employees the same based on a rating (as provided in the link @Joel posted).

2. Pay people MORE than market value. This is pretty straightforward - if the market says this person is worth $60,000, you start off paying them MORE than $60,000. Again, the idea here is to keep the focus off money and ON the job.

3. Use NOW-THAT rewards rather than IF-THEN rewards when possible.

The book goes into a lot more about motivation in general, including the importance of Autonomy and Mastery, but that's a whole other blog post on it's own; I'm not even sure I can recall it well enough to talk about it.

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This was one of the most fascinating posts and threads that you've had and I've been following you for a long time. I like the way to tend to gather information from a variety of sources before making a decision. I'm sure that is important in your work and that it has been rewarding in your personal life, too.

I'm going to get that book - it sounds like he is correct in a lot of what you have summarized here. Thanks for that! And good luck to you, always.

~J~

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@Jillian,

Thanks - I try to make educated decisions, especially in an area like this where I very new to the game (of being a boss). Pink's book ends with a list of questions you can ask yourself to help make better decisions; I'll try to organize those into a separate post / review of the book when I get some time.

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I do not know how to say it in English, I'll quote very common saying in my country, in Latin (original): "Quot homines, tot sententiae".

Trying to find pattern that will match all or most employees (aka human beings :))) will lead you to inevitable disappointment and failure.

If I would dare to vote and think about what would be the best model, I would always go with variations 2 and 4, depending of working experience. We all need motivation and we all need material motivation, unless you are rich (tbh they are even more greedy :)). Professional satisfaction is good motivator but only to critical minority. You cannot count on this, in general.

Luxury of working (running) in small (mid) sized firms, is that you have a comfort to communicate with your colleges (employees). If that is your case, do it: communicate, talk to and listen people around you. It takes time and nerves, but is, i am sure, only right way to go.
If you cannot afford it, take a risk, adopt one or two models, and hope you won't lose you best men without prior notice :)))

However, thinking and writing about it is big step to best possible(!) solution (model) for you and your employees.

Good luck!

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@Marko,

I think #4 is definitely the way to go if you can; not only does it get money off the table and allow people to concentrate on the creative aspects of their work, it allows us (as employERs) feel the emotional satisfaction of being able to tread their employees as good as possible.

@Troy,

Yeah, he really gives a good talk.

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Great post Ben. In a business employers should look for qualified employees that fits the job so that they are worth paying for.

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