Most companies today uses differentiated salaries for their employees. This is something that is in general considered to be the way it must be; the companies needs the system in order to attract and keep talent employees to secure future profits for the business. This was also my belief until a few years ago; I thought that companies should pay more to the ones that produce more value to the business. Even if I saw cases where I thought people got too big salary increases and others too low at the annual salary review, I believed that in the long run the salaries would reflect the true values of each employee.
But during the last few years I have started to think differently. I do not believe in differentiated salaries any more, at least not for knowledge work like product development. There is too much evidence that the system you need to have in order to enable salary reviews each year, is impeding the progress of the business and lowers its result and profit. Knowledge work is based around motivated employees that have the support and environment they need to be creative during their daily work. Appraisals system, which is needed to implement differentiated salaries, is demotivating for the employees instead, and is therefore working against the high performance of the organization. Also, differentiated salaries is created under the belief that it is external motivations that drive people to be high performers, but as Pink describes in his book, Drive, it is autonomy, mastery and purpose that motivates people, i.e. intrinsic aspects instead.
This is also like Dr. Deming says in his book Out of the Crisis:
Evaluation of performance, merit rating, or annual review… The idea of a merit rating is alluring. the sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good. The effect is exactly the opposite of what the words promise
My own experiencealign to this as well, both as an employee and as a manager, where I personally have witnessed the negative effect the system has had on its people and the company.