Unless you just returned from a two month sabbatical from the Internet, you know that last month Dan Price at Gravity Payments announced a minimum salary of $70,000 per year for the entire company. Some people say it’s just a PR stunt. Many others applaud him for taking care of his employees, and others see some combination of the two. In one of the many interviews with Price, he asked other CEOs to join the conversation. So, thank you Dan for the opportunity to share my philosophy on employee compensation.

Price’s move is definitely bold. Moving the minimum salary to $70,000, when their average salary today is about $45,000, will obviously have a huge impact to Gravity Payments’ expenses. It will also have a huge impact on their hiring, and has been a boon to their customer base. It’s impossible to predict how the combination of variables will impact Gravity Payments. The bottom line: I like Price’s willingness to take action and try something different. If this is successful we’ll likely see a growing number of companies taking similar actions.

Now for my philosophy. I believe that the traditional approach of annual raises based on employee effort has some fundamental flaws. Market rates for many technical jobs, like software engineers, don’t increase at the same rate as the typical raise of 3-10%. Under this model, loyal engineers that have been working at the same company for five to ten years are soon underpaid and are thereby incented to switch to a different company in order to get their salary back to market rate. For other positions, the standard raise may leave someone making a lot more at their current company than they could make anywhere else, financially handcuffing them to their job.

As CEO of a self-funded, privately-owned company, I am responsible for the livelihoods of thirty families. Determining the salary for each employee is a very subjective task based on myriad factors such as employee performance, culture fit, and market rate for similar jobs in our region and industry.

At MetaGeek, we are trying a different approach to employee compensation. Our salary structure is based on the Top of Market Salary philosophy from Netflix. The Top of Market philosophy aligns everyone’s salary with the current market annually. The process is very straightforward; for each employee we ask the following three questions:

1. How much would another company likely pay this person?
2. How much would a replacement cost us?
3. How much would we pay them if they had a higher offer from another company?

The answers to these three questions answers the primary question: how much value does this employee provide? Top of Market means that some people may not get a raise every year, while others may see significant raises. Some people have a hard time with this concept; the annual raise is a longtime tradition in many U.S. workplaces. However, it’s important to look at the person’s total compensation, not just the comparison to last year.

By changing the conversation from “annual raise percentage” to employee value, the focus is now on how an employee can increase their value to the company. While many jobs have an indirect connection to the company’s revenue and expenses, intuitively it is easy to connect an increase in employee value to an increase in our bottom line. Because we use Scrum across the entire company, the link between employee value and our company’s financial health is fairly straightforward. As employees increase their value to MetaGeek, MetaGeek’s bottom line improves.

As the company’s bottom line improves it is easy to increase the employee’s salary without a negative impact on the livelihoods of the other thirty employees. Focusing on the value provided by each employee is a win-win; it improves the company and it improves the employee’s ability to increase their salary. In the long term, it isn’t beneficial to anyone to artificially create way-above-market salaries, but I’ll gladly help each and every employee raise their market value. In this model we all grow together.