In my mind, firms have to be very careful with the signals they send through compensation. There has to be a realization that eventually the good performance will push the limits of the compensation range for that position. If we keep sending encouraging signals to an employee but don’t promote that person, at some point we will have a problem. This is another example of paving the road to hell: Firms often reward good performance even though it’s not really leading to the next step in the career track. There has to be an understanding in every firm that even if you are very good at your current job, if you don’t move up to the next job you may reach the limits of your salary increases. This statement frequently gets a strong reaction: “How could you possibly not be rewarding a good contributor?!” Think of it this way: How much would you pay a “good” backup quarterback who is never developing enough to be a starter?

I tend to think that incentive compensation is much better for this purpose. Large salary increases should be reserved for those progressing toward the next step in their career tracks, rather than just offering good performance in their current roles. Incentives (bonuses) can reward those who are doing very well in their current positions.

Create Transparency

Coming up with compensation for an employee means making a triangulation among three variables—what the market surveys say his or her role is worth, what the internal equity of the company says the role is worth, and what the employee’s performance history suggests. This entire process works best when it is transparent and well understood. When everyone knows what the rules are and how the decisions are made, the chances of conflict, misunderstanding and haggling are fewer. You would never try to wrangle over the price of a souvenir you are buying from the Museum of Modern Art gift shop, where all the prices are posted, but you would likely try to bargain with a street artist outside the museum because you perceive that everyone does that and it’s the only way to get a fair deal.

Firms can be shockingly shy about discussing compensation. Most of the firms I have worked with are reluctant to talk about it with their employees and approach the subject the same way I approach buying underwear: They try to get out of there as quickly as possible and with the minimum amount of talking possible.

But there is no reason for that.

My experience is that everyone tends to figure out how much others are making anyway. People form surprisingly accurate perceptions by simply looking around, observing lifestyles and peeking at data here and there. The secrecy serves no purpose of privacy because there really isn’t any. It only serves to create suspicions.

One of our clients once called me. He was very upset and was planning to fire one of his best young employees. The team member was a star performer, but he had committed the sin of going to the CEO’s office and asking for a $20,000 raise. My client, the CEO, saw it as greed and a lack of team spirit. He thought it best to “nip the bud” and just fire the employee before his “disruptive” behavior poisoned the firm.

It turned out the young employee, who was very inexperienced, had read an article suggesting that if you want to get a raise you need to ask for one. The employee had no idea how his salary was determined, so he figured that everyone asked.

Instead of a black box, I would propose a system where all the rules and inputs are very well known and understood. It is well known how compensation is determined, when and by whom. When all the rules are known, then compensation discussions become relatively easy and focus on merit and contribution—and that is the right conversation. So … you don’t have to post the salaries on the fridge. But hopefully if someone does it, nobody notices.