Choosing your own pay, how does this work?

A step-by-step guide on how to implement pick your own pay in your company.

 · 6 min read

I had put out a message on my social feed that we let people "pick their own pay and approved it unmoderated" and immediately got thrown a bunch of questions. Allowing everyone in the team to pick their own pay is highly unusual. How does this work? It took us more than a year to reach this place and we did not find a thorough explanation or framework to make this happen, so the goal of this post is to help more companies who want to try it out.

Step 0: Trust

The place to start understanding this is first watching this amazing TED talk by Ricardo Semler who tried this at SEMCO, a company with thousands of employees. There is one key element that Semler talks about and which really underpins this entire model, trust. You have to trust that you have hired good, smart, intelligent, honest people and now you trust them to do what is best for the company based on their understanding. But Semler does not chart out a path from going from not having this trust to having it. Here is how Frappe’s journey was.

Step 1: Transparency

Our journey began when we decided to move towards a truly democratic model of working. (While we love Semler, our ideas were inspired from the democratic education movement). The underlying principle of a democracy is that everyone’s voice is equal, which is expressed by the simple phrase one-person-one-vote. No matter where you stand in traditional hierarchies (age, skill etc) but in a democracy, your voice is still of one. The decisions we take have to be the collective decisions of the team. There are also pre-conditions to democracy, here are two most important ones.

  1. Transparency: Without transparency people don’t have the right information to make a decision.
  2. Freedom of speech: Without freedom of speech, people don’t get to hear all opinions and hence cannot make the best decision.

The first thing you have to do is to foster a culture of transparency and freedom of speech and expression. All financial data must be accessible to all team members including everyone’s pay. In group calls, dissenting voices must be welcomed because it takes courage to speak up against a majority. We welcome dissenting voices because they help us make better decisions.

When thrown into such an environment, people don’t automatically speak up, so it will take a while for people to be comfortable in expressing an opinion. Also everyone cannot process everything, so most people will be happier listening to debates than participating in one.

In the case of pay proposals, all pay proposals were transparent. People were expected to write an essay (statement of purpose) reflecting on their last year and plans for the new year. These essays were also public and people were allowed to change their proposals seeing their colleagues propose numbers (quite a few people increased their proposals when they saw colleagues make bolder proposals!)

Step 2: Performance Framework

The next important step is to establish a good performance framework so that people know what is generally expected at what level of performance. At Frappe, we made a simple chart that would help people to figure out ballpark numbers of where you stand in the chart.

Pay Bands

Beyond this chart, each team went ahead and made their own internal working. This chart was also a culmination of a discussion that went on for almost 6 months. The goal was to let people know what is expected at what pay and also chart a career path within the company.

Such a system helps in setting some kind of a shared understanding (which is also imperfect) of what is expected at each pay scale. While this system was not perfect and did not detail what exactly was needed at each level, it is also important to allow freedom for people to adapt the framework to their needs. Ultimately they can talk to and verify their goals and proposals with mentors (interestingly many did not verify their own proposals)

Step 3: Accountability Framework

It is also important that people know how they are going to be held accountable to their pay. While proposing the method, we had voted that these numbers will be based on qualities demonstrated in the last six months. But we also discussed that people are free to add aspects of future performance though the feeling was that the weight should be on demonstrated abilities.

But when we saw the proposals, few of the numbers seemed like they had been based on future commitments or comparison with funded unicorns. There is incredible pay inflation going on in the market, and while people know Frappe is mostly a self-funded company (though we raised a small seed round from Zerodha last year), a few people decided that it is worth staying in Frappe only if they get these unicorn salaries, which is also a fair thought. Others pointed out that Frappe does not put much pressure on its team members unlike unicorns which have to deliver hyper growth, so it would seem that those who have taken salaries based on future goals or market comparisons should be held accountable to those standards.

Frappe does not have a very well defined way to measure goals and performance and one of the preconditions to passing this was that many team members wanted a better performance management system. Once this was agreed on, we got a greater buy-in from many members.

Step 4: Mental Health

No discussion on pay and performance is complete without a discussion on Mental Health. It was important to assert that those who did not ask for big pay proposals did not mean they were less ambitious. It just meant they valued their mental health more than maximising their benefits. Having a long career is like running a marathon, it is always less taxing to ask for pay hikes after demonstrating your value rather than before.

Those who did ask for very ambitious pay proposals were made aware that the hypothetical Damocles Sword is always on their head. Many people thrive in such challenging environments and it brings out the best of them, but many people tend to burn out. We wanted to let people choose what they wanted to do, making them aware of the consequences.

Step -1: Self Awareness

None of this really happens without self awareness. Nothing brings out raw emotion, sense of justice and jealousy as pay. Everyone reacts when they see what others have proposed, they tend to ignore people who have taken moderate pay and focus their energies on people who are on the top of the list. At some level, they have to learn to ignore all this noise and focus on their own pay proposal that they have to justify first to themselves and then to others.

Even in the timeframe of a week, we have seen so much drama, insecurity, emotion and confusion, but in the end it all settles down. We end up with higher awareness of our own self and a deeper sense of understanding on how we are judged. Unfortunately this is all part of being human and the only way to address this is to let the emotions settle down and look within.

The Key Difference: Agency

Ultimately there is no such thing as a free lunch and while it seems utopian to let people pick their pay, it does not mean all is well. But there is a huge, huge difference. Here the agency lies with the individual. Even if there is no free lunch, you have to decide how much risk and reward you want to take, not your manager. And it shows that your team totally trusts you to take this decision in the best interest of the company. It is a tremendous leap of faith in everyone and it feels incredibly positive (at least at the moment).

As the year progresses, we will keep you updated on how this is working out!


Rushabh Mehta

Rushabh is a software developer and founder of ERPNext. He usually writes about the startup experience, open source and the technologies he is working on.

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Dylan James 5 months ago

A good process definition; Coming from an aggressively growing start-up and helping it scale, we came across similar instances of extremely high trust, accountability, self awareness and end-goal driven mindset but never put it to writing yet. This blog certainly outlines not only a process but a well defined framework for performance that peak my interest.

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Robert Becht 5 months ago

As a person who professionally only knows about rock and water (hydrogeology) Rushabh's blogs keeps amazing me. He keeps on challenging vested ideas and experiments with out-of-the box management approaches.

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Hamzah Mauzam Ali 6 months ago

One of the most amazing steps in erpnext, rushabh you never stop teaching us. Thank you

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Muchai 6 months ago

Great. Kept wondering about the below. Would they lead to a cycle of increases as people kept comparing their picked pay, to their team members picked pay.

"quite a few people increased their proposals when they saw colleagues make bolder proposals!"

"Everyone reacts when they see what others have proposed, they tend to ignore people who have taken moderate pay and focus their energies on people who are on the top of the list."