You really are trying to solve the wrong problem. If you have decided turnover is 20k a year value, just set your "midpoint" salary at 85k instead of 70k.

Or alternatively, instead of making compensation review a once/year thing, make it part of a regular ongoing feedback cycle. The reason that this:

This is followed by a period of watching how much they squeak squirm with dissatisfaction

happens is because most of the time, the way raises are decided is something like:

• Employee works for 11.5 months with no feedback (apparently 6 in your case)
• Employee gets yearly review
• Employee raise gets set based on yearly review
• Employee has no chance to correct performance which might impact their review
• Employer provides feedback infrequently enough to allow any actual adjustment
• Normally, reviews are not negotiable - they are set by management and the employee is simply recipient

This is why yearly reviews suck for employees. If on a regular basis throughout a year employees are receiving feedback, understanding what they need to do in order to raise their performance, they are far more like to either:

• Be ok with their "meets expectations" review
• Not be dissatisfied with their yearly salary increase

Naturally it is considerably easier to do a once/year review than it is to be good at management. A good manager provides regular feedback.

Another alternative is just to make a formula for salary that employees plug their numbers into. Stack Overflow does this.

Anecdotally, at a previous employer, this all worked to my advantage that the company did NOT do this - I was able to ask my manager and basically understand exactly what amount of my work would be required for increasing my review the various levels. Ultimately I decided it was not worth it for me to "aim for the highest" rating given the amount of work required. But this was my decision, in light of the information I had. Not a black-box.

Unfortunately most employees are not going to do this.

Is it an optimal strategy in salary negotiations to let the employee decide?

Let me give you my personal experience.

My current salary is basically exactly the number I gave the hiring manager, upon similar conditions to what you are saying - they wanted me to pick a salary I felt was fair.

Now this required me to:

• Meaningfully understand the pay range of my position (though I just directly asked, most employees won't do this)
• Play a mind game. Do they want me to pick a reasonable number? Should I ask for as much as I can get?
• Lead negotiations

A few observations from this process. First, and perhaps most importantly, by giving the employee the stipulation to set the number you put them into a variety of awkward situations, discussed well in other answers.

However, a more insidious problem which may work against you is that ambitious or good employees now will always wonder, "could I have gotten more?"

I think several of your assumptions are also misguided:

Nobody switches to an identical salary unless it's a sideways move

This isn't technically true. People do this for companies that have better benefits, culture, worklife balance, more interesting work, better career options, stability, etc.

Belief 2 - the employee has better information about their value - based on them being nearer the information about their skills, positive contributions and self interest in the literal sense.

This isn't true.

My value that I decide isn't my market value. It's what companies are willing to pay me. I could pick $1,000,000 a year. But I'll never get it.

So you really end up with employees feeling even more uncertain about their worth than before, because now they are setting the thresholds - if the employer rubber stamps it, then they fairly naturally will feel underpaid. "If they accepted X% raise, why wouldn't they have accepted X+1%?"