It's been a while, but our company (about 45 employees) went through a lot of soul-searching about compensation a bunch of years ago. I would recommend Alfie Kohn's book Punished by Rewards for some of our thoughts on compensation.
We kept running into problems with the traditional model of pay tied to performance reviews for all sorts of reasons. If you think about it, that model of compensation only discourages teamwork. The pool of money for raises is fixed, and so the only way to get more money than your coworkers is to make sure they perform worse than you. Also, some people aren't really motivated by money, and so micromanaging their jobs by dangling financial carrots in front of them for parts of it only rewards those who are good at playing the system.
We opted for a pretty straightforward chart. We have four pay grades, and your pay is based on your years of experience. New hires don't necessarily start at zero years; it depends on the experience they come in with. The lowest pay grade is actually above-market; that's because we feel that even though the market would allow us to pay our low-level administrative staff less than we do, we don't feel that's right.
It literally is the case that, effectively, most employee's salaries are public information within the company, because of the chart.
We would rather not hire someone than hire the wrong person. It takes about a year before someone is really up to speed and earning the company money, so we really don't want to invest the training effort unless we're sure it's going to work out. On the flip side, if someone isn't working out, and all of our and their efforts at improvement fail, they should not be working for us, and we are in a state (Vermont) where we can do that.
As someone who used to have to do performance reviews and hated them, I like this method much better.
We can do this because although we are a privately held, for-profit, corporation, two thirds of the shares are owned by myself and my business partner.
Our company provides pediatric practice management and consulting software and services, and has been a leader in this field for over 25 years.
We are growing and hiring, even during this recession. We've weathered them before, and expect to in the future.