With no bosses, how do Zappos employees get raises?

By Daniel Rothberg

Wednesday, July 15, 2015 | 2 a.m.

A workplace with no managers and no hierarchy — as Las Vegas-based retailer Zappos has recently become, to much media attention — brings up some immediate questions.

Chief among them: Who decides how much anyone gets paid?

The basic premise of holacracy, the company's radical new management structure, is to organize all work around roles rather than titles, with Zappos employees, all the way up to CEO Tony Hsieh, reporting to teams — or circles, in their terminology — rather than individuals.

In Zappos philosophy, employees’ paychecks should be determined by their skills. In practice, that means employees earn what Zappos officials call “badges” for specific skills, ranging from retail math to managing Outlook and understanding Excel.

Employees are free to earn badges at their discretion, giving them the freedom to chart their own career path through the company. If, for instance, you work in marketing but are interested in merchandising, you could expand your portfolio by earning merchandising badges.

“It’s kind of similar to gaming and leveling up, if you will,” said Lisa Jewett, whose roles at Zappos include oversight of the program.

The company is still in the process of creating its badges and for the time being, they are not directly tied to compensation. In order to get a bump in pay, employees must submit an application to the compensation circle, a team of employees responsible for pay. Once the system is built, Jewett said, the company hopes that earning a compensation badge will automatically trigger a raise in pay.

The badges will be displayed on a digital system, public to all company employees, and will be issued by a “validator” after some proof of proficiency, be that an assessment, a rubric or an interview.

There are aspects of this skill-based pay system that remind John Sumser, a principal analyst at KeyInterval Research who studies HR practices, of how pay is determined for union jobs. Being well-positioned in the market, he said the online retailer has some room to experiment.

“Zappos is in the unique position of not having to care about margin,” Sumser said. “If you don’t have to care about margin, you can try all sorts of stuff and that’s where all the really great breakthroughs happen.”

The People Pool and Comp circle, which determines pay policy for the company, made the decision to switch to badging in April, Jewett said. Hsieh is the circle’s leader, or “lead link.” Although salaries for managers were grandfathered in after the change to holacracy, future raises for managers, including Hsieh, will be subject to badging.

It’s unclear whether Hsieh or a member of the People Pool and Comp circle would need to recuse themselves if there was a conflict of interest, such as an application to raise their salary.

Hsieh has taken his share of criticism for flattening the managerial system, most recently in a 7,000-word PandoDaily piece written by Paul Carr, who lived in Las Vegas for two years and received funding from Hsieh’s Downtown Project. He criticized holacracy for, among other things, lacking a replacement for managerial roles, such as mentorship, compensation, hiring and firing. And amid the transition to holacracy, about 210 employees — 14 percent of the staff — left Zappos.

Zappos officials maintain that the badging system is empowering and more equitable, allowing employees to create their own career path through the skills they acquire.

“You are gaining more experience so your compensation goes up based on your experience,” Jewett said.

Plus, the badges — Jewett expects there to be hundreds — are transparent so any Zappos employee can see a colleague’s skills and find a coworker with knowledge they’re looking for.

Sumser said in his experience, using skills to measure pay provides employers with an opportunity to determine which skills they want to prioritize.

“If ... there’s a path for somebody to educate himself, then he will,” Sumser said. “The question the company will have to answer: Is that what they want?”

In addition to compensation badges, Zappos employees are also able to create their own uncompensated badges for personal skills, like Yoga, or for events, like a badge created for participating in a giveaway for employees organized on Instagram by e-commerce company Toms.

One badge that some employees are currently working on is the Teal 101 badge, which, according to a memo, “will certify that an employee has completed the activities needed to show that he/she has a basic intellectual understanding of what “Teal” means.”

A “Teal” organization emphasizes self-management and self-governance.

The badge is not currently considered in determining compensation but it still provides interesting insight into how the badges work. It has its own logo — teal, of course — with a faded 101 and two butterflies. The requirements for the badge include assigned reading, “1-3 paragraphs about how you envision 'Teal' applying to your role(s) at Zappos” and envisioning “what a new purpose statement for Zappos might look like.” The validator, who reviews and approves the Teal 101 badge, is the lead link of the Teal 101 badge circle.

Like any pay system, the badges have natural limits. They might miss less quantifiable skills like judgment, emotional intelligence or motivation. Jewett said there’s little chance skills like that would ever be tied to compensation.

Right now, Sumser said Zappos is able to experiment with ideas like holacracy and badges because they don’t need to worry about profit margins. But questions remain about whether the experimental management system will continue to work through tougher economic times, he said.

“What they do when they have revenue problems will tell you everything there is to know about all of these ideas,” Sumser said.