A firm makes a job offer. A new hire, often desperate for a job, accepts. But there is the small matter of money. In many cases, because they are eager for work, new hires accept the employer’s salary offer, just as some car buyers accept the manufacturer’s suggested retail price (MSRP). But negotiation is not just possible. An employee who negotiates a better salary than the initial offer may benefit the firm and improve his or her career. The reason is that long-term business relationships require mutuality. A new hire who gets better than the minimum amount is more likely to stay for the long haul. Mutuality is related to the best negotiation approach, integrative or win-win bargaining, that Roger Fisher and William Ury advocate in their classic book Getting to Yes.
How HR Determines Your Pay
Salary negotiation is related to how human resource (HR) departments determine pay. Firms consider several components including market comparisons, internal comparisons to other jobs within the firm (known as job evaluation) and performance or merit increases. The last is a small proportion of most employees’ pay packages. In most fields, until someone gets to the executive level, base pay is the lion’s share of compensation.
Merit or performance increases are slow. In many firms, the difference between the raise given to a top performer and to a mediocre one is small. According to empirical research published in The Quarterly Journal of Economics (George Baker, Michael Gibbs and Bengt Holmstrom "The Internal Economics of the Firm: Evidence From Personnel Data," 109:4, November 1994, 881-919), differences in year of hire (reflecting tight or loose labor markets in different years) have continued to be reflected in base pay decades after the year of hire. Although economists are right to claim that marginal productivity determines pay, the reality is that the relationship is approximate and only in the long term. Most firms are inefficient in tying pay to productivity. In part, that is because of the poor quality of performance appraisal systems in many firms. Performance appraisal forms generally are not validated (that is, their relationship to productivity is not studied) and personnel psychologists have long recognized a litany of failings.
As a result, the employees who do the least to negotiate a good pay package may be the most likely to leave firms. But those who do leave may be among the better performers. Hence, employers may find that when they are flexible about negotiating pay they end up with better long-term employees.
Setting Pay Ranges
Prospective employees need to understand that firms set pay ranges for base pay based on two broad considerations:
- Pay is compared to the pay for comparable jobs in other firms.
- Pay is compared across jobs within the firms, often based on points credited due to such factors as accountability, technical know-how and interpersonal know-how that the job requires. That is, pay ranges are established based on job difficulty and responsibility and are tied to the market rate for each job.
The pay ranges limit the employer’s pay offer to a range, but variability is possible within the range.
Employees can obtain market information about jobs through websites such as Salary.com and Robert Half International’s Salary Guide. Just as invoice prices are known to car buyers because of websites such as Edmunds.com, market data on salaries is now more available to the public than it was a decade ago. Therefore, employees have a basis for negotiation. Knowledge is power. All job applicants should review the available market data on their salary offers. Knowing the internal job evaluation is more difficult, although the firm’s reputation is likely to reflect whether the firm pays above or below the average market rate.
Bargaining Your Way to a Better Salary
One of the best books on salary negotiation is Jack Chapman’s Negotiating Your Salary: How to Make $1,000 per minute, 6th Edition. Chapman emphasizes that the time to negotiate pay is after the initial offer, when the firm has a strong interest in the applicant. New hires should not just accept the offer, but use what negotiation experts call distributive and integrative bargaining techniques to motivate the employer to raise the offer by five to 10 percent.
Distributive bargaining refers to win/lose bargaining, while integrative bargaining refers to win/win bargaining. Distributive techniques involve sighing in disappointment after the initial salary offer or tapping one’s fingers on the arms of the chair and telling the HR officer that you really like the firm and you want to accept their offer but you had a higher offer elsewhere, so can’t the firm raise the amount to above the level of the other offer?
Integrative negotiation involves pointing out to the employer why raising the offer would be in the firm’s interest. Elements of integrative negotiation include being creative (inventing options for mutual gain); accentuating the positive; focusing on problem solving rather than competition; and focusing on interests rather than positions. Integrative negotiation involves turning the negotiation into a proactive, problem solving experience in which the two parties’ underlying interests are brought to the fore. In other words the job applicant may explain to the employer why it is necessary to pay above the market rate. As well, creativity in adding benefits or incentives might enable the firm to attract a productive employee without violating the internal job evaluation scale.
One of the chief errors many people make (I would argue that this is the chief false assumption holding society back in general) is the belief that the economic pie is fixed. Employers see paying an extra dollar to an employee as subtracting that dollar from profit rather than stimulating the employee to produce two dollars in profit. Back in 1914, Henry Ford thought otherwise. He raised his factory workers’ wages to a then-unheard of level of five dollars a day. Pundits thought he was crazy, but Ford made more rather than less money as a result. Likewise, the founder of modern management, Frederick Winslow Taylor, advocated paying what economists call efficiency wages. In other words, he advocated tying pay to productivity even if the resulting wages put employees 50 percent to 100 percent above the market. (He claimed that above that premium employees might suffer a wealth effect, meaning that the extra money might distract them from their focus on productivity). Taylor’s differential piece rate plan has repeatedly succeeded in raising profits, but employers resent liberality with pay even if it does raise profit.
As a result, few firms emphasize merit pay to an extent necessary to motivate the most productive and ambitious employees to stay with a firm. Moreover, there are complaints about merit pay arising from such diverse sources as the labor movement and quality guru Edward I. Deming in his book Out of the Crisis. The complaints are that merit pay is too often political; it frequently involves favoritism; and it creates variance or disturbance in the human system, leading to lower quality.
In negotiating pay, employees and employers need to consider both distributive and integrative concerns. But employers need to remember that their bargaining power is much greater than the job applicant’s in the short run but not necessarily in the long run. In the short run, the employee needs a job. In the long run, the most productive employees will be dissatisfied with pay that is not competitive. Therefore, flexible negotiation can be helpful to the firm as well as to employees.
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Mitchell Langbert, PhD, is an Associate Professor at Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.
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