Article
Self-OrganizationCompensation in Holacracy: Beyond Hierarchy-Based Pay
Traditional compensation systems don't fit self-organization. Research shows which models work in Holacracy.
Compensation is one of the most sensitive topics when introducing Holacracy. Traditional salary systems are based on hierarchy levels, titles, and spans of responsibility—all concepts that Holacracy abolishes. What happens to compensation when there are no manager titles?
Research on job satisfaction in Holacracy reveals a surprising finding: person-organization fit is a stronger predictor of satisfaction than traditional compensation factors [1]. But that doesn’t mean compensation is irrelevant—it just needs to be designed differently.
The Core Problem: Hierarchy Without Hierarchy Pay
In traditional organizations, compensation is directly tied to position:
- Manager level → Salary band X
- Senior level → Salary band Y
- Junior level → Salary band Z
Holacracy eliminates these levels. Instead, there are roles that anyone can take on—and that constantly change. An employee might have three roles today, five next week, and none of them is inherently “higher” than another.
Why Traditional Systems Fail
| Traditional Feature | Problem in Holacracy |
|---|---|
| Title-based salaries | No fixed titles anymore |
| Manager bonuses | No permanent managers |
| Promotion logic | No linear career ladder |
| Span of responsibility = salary | Responsibility is fluidly distributed |
The biggest challenge: How do you evaluate someone whose role changes every few months?
Compensation Models for Self-Organization
1. Competency-Based Compensation
Skills are compensated instead of positions:
How it works:
- Defined competency levels (e.g., Junior, Mid, Senior, Expert)
- Independent of currently held roles
- Regular competency assessments
Advantages:
- Decouples compensation from temporary roles
- Incentivizes personal development
- Transparent and traceable
Challenges:
- Who evaluates competencies in a non-hierarchy?
- Can lead to “credential hunting”
Research Insight: Studies on autonomy and engagement in self-managed organizations show that intrinsic motivation (autonomy, competence, relatedness) correlates more strongly with engagement than extrinsic reward systems [2]. This doesn’t mean fair compensation is unimportant—but that the compensation model shouldn’t undermine intrinsic motivation.
2. Market-Based Compensation
Orientation to external market prices for skills:
How it works:
- Regular market analyses for relevant skills
- Compensation oriented to external value
- Transparent salary formulas
Advantages:
- Competitive for recruitment
- Objective through market data
- Less internal politics
Challenges:
- Not all roles have clear market equivalents
- Can create internal inequalities
3. Transparent Salary Formulas
Full disclosure of how salaries are calculated:
How it works:
- Public formula (e.g., base salary + years of experience × factor + competency level)
- Anyone can trace any salary
- Changes only through formula change (governance process)
Advantages:
- Eliminates negotiating power as a factor
- Reduces gender pay gap
- Consistent with Holacracy transparency
Challenges:
- Can force difficult conversations
- Not all employees want salary transparency
4. Peer-Based Compensation Decisions
Colleagues decide on compensation adjustments:
How it works:
- Regular peer reviews or feedback rounds
- Group decides on salary adjustments
- Often combined with budget constraints
Advantages:
- Democratic and transparent
- Uses collective intelligence
- Consistent with self-organization
Challenges:
- Can become a popularity contest
- Difficult to scale
- Potentially vulnerable to peer pressure
The Zappos Case: Lessons Learned
Zappos, one of the most prominent Holacracy examples, initially kept its existing compensation system—and only gradually changed it over years [3]:
Phase 1: Holacracy without compensation change
- Existing salaries remain
- New structure, old pay
Phase 2: Gradual adjustment
- “Badges” for skill verification
- Compensation partially tied to badges
Phase 3: Badge system formalized
- Public badge requirements
- Transparent connection badge → salary
Insight: Changing compensation systems immediately is risky. Gradual evolution allows learning.
Job Satisfaction Beyond Money
Research shows that job satisfaction in Holacracy depends on different factors than in traditional organizations [1]:
| Factor | Importance (traditional) | Importance (Holacracy) |
|---|---|---|
| Salary level | High | Medium |
| Person-organization fit | Medium | Very high |
| Autonomy | Medium | Very high |
| Role clarity | Medium | High |
Research Insight: A study with 445 participants shows that perceived authenticity of the transformation is the strongest predictor of employee retention [4]. Employees who perceive the Holacracy introduction as authentic—not as a cost-cutting measure—show significantly lower turnover intentions.
This doesn’t mean compensation is unimportant—but that it’s part of a larger picture.
The Implementation Timing
Research is clear: Don’t change compensation systems at the same time as introducing Holacracy [5].
Recommendation:
- Phase 1 (Months 1-12): Introduce Holacracy, keep compensation stable
- Phase 2 (Months 12-18): Collect data, evaluate options
- Phase 3 (Months 18+): Gradual compensation adjustment
Why: The cultural prerequisites for fair peer compensation need time to develop. Trust must grow first before sensitive compensation decisions can be democratized.
Practical Recommendations
For organizations introducing Holacracy:
- Keep compensation stable initially: Don’t change everything at once
- Increase transparency gradually: Start with salary formulas, not complete openness
- Develop competency framework: Define what gets compensated independent of roles
- Establish feedback mechanisms: Before peers decide on salaries, they need practice in constructive feedback
For employees:
- Clarify expectations: What does career without promotion mean for you?
- Prioritize competency development: In competency-based systems, learning = earning
- Reflect on non-monetary values: Autonomy and meaningfulness are part of “total compensation”
SI Labs Perspective
After years with Holacracy, we’ve learned:
- Compensation isn’t the first problem: Most Holacracy challenges lie elsewhere
- Transparency helps: Clear, traceable compensation criteria reduce conflicts
- Competency over role: Tie compensation to skills, not current role load
- Evolution over revolution: Gradual adjustment works better than radical overhaul
Sources
[1] Tröster, Darja, and Jörg Felfe. “Holacracy, a Modern Form of Organizational Governance: Predictors for Person-Organization-Fit and Job Satisfaction.” Frontiers in Psychology 13 (2023). DOI: 10.3389/fpsyg.2022.1021545 [Empirical study | Person-organization fit | Citations: 22]
[2] van Eersel, Job J., et al. “Autonomy and Engagement in Self-Managing Organizations: Exploring the Relations with Job Crafting, Error Orientation and Person-Environment Fit.” Frontiers in Psychology 14 (2023). DOI: 10.3389/fpsyg.2023.1198196 [Empirical study | N=multiple organizations | Autonomy-engagement link]
[3] Groth, Aimee. “Holacracy – the Future of Organizing? The Case of Zappos.” Human Resource Management International Digest 26, no. 6 (2018): 40-42. DOI: 10.1108/hrmid-08-2018-0161 [Case study | Zappos | Citations: 27]
[4] Afshar Jahanshahi, Asghar, et al. “Turnover and Recommendation Intentions in the Post-Implementation Period of Radical Decentralization.” Journal of Organizational Change Management (2022). DOI: 10.21818/001c.37162 [Empirical study | N=445 | Employee retention]
[5] Zięba, Krzysztof. “Job Satisfaction in the Context of Teal Organization.” Acta Universitatis Nicolai Copernici. Zarządzanie 47 (2020): 75-83. DOI: 10.12775/aunc_zarz.2020.012 [Empirical study | Teal/Holacracy context | Citations: 2]
Research Methodology
This article synthesizes insights from 5 academic studies on compensation, job satisfaction, and employee retention in self-managed organizations. The central study [1] specifically examines the predictors for person-organization fit and job satisfaction in Holacracy contexts.
Limitations: Direct research on compensation systems in Holacracy is limited. Most studies address job satisfaction and employee retention generally, without comparing specific compensation models.
Disclosure
SI Labs practices Holacracy and has developed its own compensation processes. Our perspective is based on direct experience but is not necessarily transferable to other contexts.