Don't treat your employees equally!
People are company's most important resources. However, it doesn't mean that they should be treated equally. If you want to retain the best talent, then start treating people differently based on their performance.
Statistics has shown that great software engineers could be 10 times more efficient than an average software engineer. It might be hard for you to pay a great software engineer 10 times as much than an average software engineer, but at least the great software engineer should be paid much more than the average one. Otherwise, don't be surprised when your best people start to walk out of the door.
Pay unfairly, and have a wide variation in pay that reflects the power law distribution of performance.
It is okay to pay two people in the same job completely different amounts. Payment could be done in paid in made in different ways. For startups that lack the financial resources could give out stock options instead. Payment could be given out in non financial forms such as recognitions, celebrations and promotions. Different methodologies are possible, as long as it creates an incentive for employees to stay hungry and ambitious enough to keep striving for big impact.
Pay your people based on their performances and not on their seniority. I had known one company that give up stock options that is worth millions of dollars to the senior executives, roughly about 0.3 percent of the workforce at the company, and grant a few thousand dollars to the junior executives, roughly about 1 percent of the workforce, and grant nothing the the other 98.7% of the employees. Yes, senior employees tend to start higher in terms of payment when compared to the Junior levels. However, this doesn't mean that in the long term they should be paid more.
At one of the company that I have been with, we gave out our rewards based on the performance of the person and at the same time how long the person has been with the company. In my opinion, I disagree with the part on the reward based on the duration at the company. The person could be at the company for 10 years and if he has continuously displayed poor performance, then this person should be rewarded much less than a person that has been at the company for only 1 year but contributed greatly. If the senior person is dissatisfied, then let it be, let him walk out of the door. Its much better than having your top performers walk out of the door.
Pay unfairly: Your best people are better than you think, and worth more than you pay them.
On the market, we most often set rules about how much a certain position within the company could be made. Typically, companies allow salaries to vary from market by plus of minus 20 percent. With the best people perhaps 30 percent above market. An average performer might get 2-3 percent salary increase each year and an exceptional performer might get 5-10 percent, depending on the company. Therefore, if you are an exceptional performer, you will get a series of big increase at first. However, as time goes on, your increase will get slower and eventually stop as you approach the upper boundary of the permissible salary range. What would you do as an exceptional performer?
This payment system is broken. However, most companies manage pay like this to control costs. They think that the range of performance for a similar position is somewhat narrow, but in reality this is wrong. In today's society where information is much more prevalent and accessible. The mobility of the people have increased dramatically. The best people are much more discoverable. As result, be able to find a place where their true value are appreciated.