Pay Democracy: A Good Idea?

Featured in the "Managing" column of today's Wall Street Journal ( Can a Company Be Run as a Democracy? by Jaclyne Badal - subscription required) is the story of Ternary Software, Inc., an organization which runs itself as a democracy.

The 19 employee company, located in Exton, PA, is run by a policy setting team of seven people, including two front line workers elected by their peers.  Links from policy team members through other groups throughout the Company provide an avenue by which all employees ultimately have a say in company decisions.  Interestingly, one of the examples used to illustrate this corporate democracy centered on the compensation program, as the excerpt below describes.

The repeated changes to Ternary's pay scale last year demonstrate employee empowerment in action.  The company shares financial data, including everyone's salary, with all employees.  In 2005, Bill Schofield proposed cutting the salaries of senior programmers, including his own, by 15%, and boosting compensation for junior programmers.  The council agreed.

Then, last summer, Ternary ran into a cash crunch because some customers weren't paying their bills on time.  The strategy council slashed salaries by 22%.  That rattled Chad Wolfe, a 29-year-old Canadian programmer who told his representative on the strategy team that he would have trouble paying his personal bills.  So the team devised no-interest loans for needy employees.

"It's frustrating and hard not to be able to count on your paycheck being consistent," Mr. Wolfe says.  But he still likes working at Ternary.

Four months later, in November, Ternary restored the pay cut.  Then, in January, several employees asked the strategy group to give everyone a raise, as thanks for staying through the bad time.  Salaried rose 20%.  Last month, Ternary paid employees the money they lost during the four-month pay cut, plus interest.  Mr. Wolfe will start repaying his roughly $2,000 interest-free loan at the end of April.

Mr. Robertson says the pay saga highlights why the practice works.  Instead of getting upset and leaving, the employees "used the system to inject feedback and get their needs met," he says.

Your reaction?  I have to confess that the story, particularly the last bit quoted here, makes me cringe a bit.  On the one hand, I do think that providing a certain amount of transparency and employee say in pay program decisions is a powerful and positive thing.  On the other hand, I have also had the opportunity to work with a wide range of employee groups who have been charged with various pay and performance program development tasks.  Given education, guidance and some structure, my experience is that employee groups can make thoughtful and effective decisions, which carry a great deal of credibility with their peers through the organization.  Too much power absent counterbalancing direction and control, despite the best of intentions, can result in short-sighted, insufficiently thought through and even damaging decisions.   

I wonder, for example, about the long-term impact of the kind of whipsaw compensation policy described above on employee morale and retention.

Or am I just too stuck on the role and importance of "experts" in guiding compensation policy setting?  

Comments

[Paul Hebert]

I'm not so worried about the whipsaw effect of changing pay structures as much as I would worry that as the employee population grew the connections between employees and the company would become less altruistic creating decisions that would focus more on the individual than on the company as a whole.

We've seen it occur in our own country as voters rally to support a policy and/or change that isn't in the best interest of the majority but more focused on the interest of a more vocal and crafty minority.

In addition, as the employee base grew, the social pressure to do the right thing would decrease as annonimity within the organization increased. Instead of one vote out of 19 it would be one vote out of 19,000 - a much different group dynamic would be in effect leading to less than optimal decision making.

I think this would work in small, socially-connected organizations, but would be a disaster in the a more traditional, larger organization.