You always have tradeoffs. Which tradeoffs make sense depend on the culture you want to foster, the size of your company, and probably a hundred other factors.

Transparent criteria for salary mean that you avoid the politics associated with salary negotiations. And making even a single exception typically breaks that, meaning that now everyone at the company is incentivized to get higher-paying offers and bring to you, asking for more money. Ben Horowitz wrote a great post on this: http://bhorowitz.com/2010/08/23/how-to-minimize-politics-in-...

Personally I would say that you should avoid ad-hoc raises. I really like the idea of matching salaries to titles and matching title changes to a bi-annual performance review (for companies over a certain size.) And it gets a lot of the advantages you want-transparent compensation, no incentives for politicking, ability to pay people differently, and the ability to adjust the pay for the role according to market rates.

Edit: Fog Creek's compensation system is a good example. http://www.joelonsoftware.com/articles/fog0000000038.html

Matching salaries to titles means your best-performing developers can't get a raise without becoming managers, or getting a raise for everyone in their title (i.e. a raise that's much more expensive for the company), or leaving the company.

Seems like quite a pair of handcuffs to put on yourself.

Most places have more than one developer title. See e.g. the Fog Creek link.

> So my question is, how do you solve this?

I think I can offer some insight on that, because I'm Figure 53's employee #2 (after Chris). I live near San Francisco, where with some effort I could quite possibly find a job that paid 20% more than I'm making with Figure 53 if I wanted to. And my first child will be born in the next 3 weeks! Oh, I also bought a house in June, for extra measure. :-)

Would a 20% raise be enough to draw me away from Figure 53 to work for one of the many startups around here? Hell no. A 200% raise wouldn't be enough. Some of the many reasons why:

- I'm passionate about our products, but even more so about the art that gets made with them. I'm a musician who learned to code in order to make the tools that I wanted to use, and now I get paid to make those tools, and help other people use them. Whether it's a high school play or the Olympics, it's really freaking cool to see what your customers create with your work.

- Family is important to me, and working from home (and not on a 9-5) means that I'll be able to spend time with my daughter even after I come back from paternity leave. Chris is of a similar sensibility, so I never have to do any convincing on that score.

- I don't have to worry about whether the company's going to be around next month, because I know our money is being managed conservatively. We're in it for the long haul, which our customers also appreciate.

In short, Chris solves the issue of employee retention by making Figure 53 compete in many more important arenas than salary, from the more banal things like job stability to the more intangible things that go into quality of life. That's not to say that we aren't being compensated appropriately for what we do -- Chris has made it clear he's all ears if any of us ever feels we're being short-changed. But otherwise, if I went to him and said, "Hey, Schmooblr LLC is offering me 20% more, pay up or I walk", that would be a sure sign that I was not a great fit for the company in the first place.

Where I work, we have a similar system of transparent salaries. There is a scale, but it is not very granular (the rule of thumb is that if most people couldn't guess a given employee's salary level, they're in the wrong one) and dependent on skills and industry experience. There is a good description here: http://www.joelonsoftware.com/articles/fog0000000038.html (SatvikBeri also linked to this article). That is still relevant except for a few points - we no longer give stock options and reviews are annual instead of biannual.

> If a good employee has an offer for 20% more than they are making...

We let them leave. That said, it doesn't happen often (I don't know of a time it did). Our salaries (and annual bonuses) are generous, and any differences are more than made up for by various other perks.

That said, we do lose new hires to bigger offers. If this happens too often, the entire pay scale gets moved up to reflect market changes and/or inflation.

One option is to be small and have a tight grouping of potential.

Another option is to reward those employees with non-cash rewards.

Finally if their contribution is easily measurable, a bonus or commission system tied to those metrics could be transparent and perceived as fair.

I think in this case you have 2 choices. One, you let that employee move on. Or 2, you have to re-enter the group salary discussion. Being dishonest in your transparency would quite probably do irreparable harm to the culture.