How Zappos decides how much to pay employees under its new 'self-management' system

In 2013, Zappos began transitioning to "Holacracy," an alternative management system that replaces a pyramidal hierarchy with a network of circles dedicated to specific functions like marketing or HR, and ditches traditional management.

Job titles are replaced with "roles" that employees can accumulate.

This past March, CEO Tony Hsieh decided the transition was moving too slowly and offered employees a severance package to leave the company if they didn't agree with its direction.

By May, 210 of the roughly 1,500 employees (14%) took the deal, and the Amazon-owned online retailer was all in with Holacracy.

One of the key challenges the company faces during this time of transformation is figuring out how to pay workers who don't have traditional job titles. It's now experimenting with a "badge-based compensation" system developed by Holacracy founder Brian Robertson.

Employees receive various badges that represent roles and skills they have. Currently the badges don't represent pay, but they may in the near future.

"At this time, compensation is tied to roles, and the badges encompass the work or skills being done in those roles," says Lisa Jewett, who has the role of "@Badge_Librarian" and is leading how compensation works in the Zappos Holacracy. "However, we are currently in the process of building a more robust badging system that will allow people to build their salary based on the avenues they would like to pursue."

Essentially, that means that the pursuit of badges may eventually resemble a "leveling up" process from video games, where the acquiring of a new badge automatically equals a bigger paycheck. As of now, employees looking for a raise submit an application to Zappos' Compensation Circle, a group of employees responsible for approving salaries.

Jewett says Zappos still hires employees for traditional job roles and determines their base salaries accordingly. Once employees have undergone necessary Holacracy training, they can begin to pursue a more customized path by taking on roles in different parts of the company.

For example, "if we are hiring them for the call center, then it would be the market value call-center pay," Jewett says. "Once the employee is onboarded they will have the opportunity to expand their roles by earning different badges, giving them both the potential of earning more compensation and pursuing their passions."

There are also badges that are not tied to roles that result in a raise, such as the Teal 101 badge, which employees can earn after reading management guru Frederic Laloux's book, "Reinventing Organizations," and writing one to three paragraphs demonstrating their understanding, the Las Vegas Sun reports.

Badges also exist for non-monetary roles like proficiency in talking about Teal companies (what Zappos aspires to be) and teaching yoga. Jewett says these reinforce Hsieh's Core Value No. 3 to "create fun and a little weirdness," and self-expression has always been at the heart of Zappos.

All of these badges are accessible to browse in an internal database open to all employees. And while Zappos would not share designs with us, each badge has a unique design representing its role.

The Teal 101 Badge, according to the Las Vegas Sun, consists of two teal butterflies with a "101," inspired by Laloux's book cover.

There are no restrictions as to which type of roles employees can pursue, beyond meeting certain prerequisites. As Jewett says, "Before you can earn a Merchandising Planning Badge 103, you need to earn 102 first."

Zappos will continue to see how role-based compensation and eventually a full-fledged badge-based compensation system will work, and is also considering options it has yet to reveal.

"It's been moving really fast and people are excited, but until we flush out all the bugs we will be in a testing phase," Jewett explains. "We are also looking at other ways as well to enhance the compensation conversation."