Salary Expectations: Calibrating Pay During a Labor Shortage

Employees’ salary expectations hinge significantly on their fairness concerns. When setting and negotiating salaries, managers would be wise to factor in fairness perceptions and take steps to reduce bias.

By Katie Shonkon / Salary Negotiations

salary expectations

Employers may strive to set and negotiate salaries in a fair manner, but numerous factors can affect employees’ salary expectations and lead employees to believe they are being treated unfairly.

Consider Karen Womack, a warehouse manager at Seattle’s T-Mobile Park, the home of Major League Baseball’s Seattle Mariners. Womack was earning $16.70 per hour before the Covid-19 pandemic. After the city of Seattle mandated an increase in the minimum wage to $16.69, people who reported to Womack suddenly were earning just a penny less than she was. “It didn’t feel fair at all,” she told the Wall Street Journal.

The union representing Womack and other warehouse workers, Unite Here, ended up renegotiating salary with their employer, Centerplate, to increase the pay of union employees by at least $1.80 per hour. With her pay raised to $19.95 an hour, Womack told the Journal she has been able to prequalify for a mortgage and is much happier with her job.

Womack’s story highlights the significant role that fairness concerns play in employees’ salary expectations. In addition to considering whether we are being paid an appropriate wage for the work we perform, we also look around to consider whether we are being paid fairly relative to others.

Fairness concerns affect employees at all ends of the employment spectrum. When MBA students are asked to imagine they have been offered a highly appealing job that pays $110,000 per year, they often sour on the job if they are told that some graduating MBAs from similar-quality schools are being offered $10,000 more a year, write Max H. Bazerman and Don A. Moore in their book Judgment in Managerial Decision Making (Wiley, 8th edition, 2013). “People care passionately about fairness despite the fact that economic theory dismisses such concerns as superfluous to our decisions,” the authors write.

Amid the labor shortages of the Covid-19 pandemic and growing attention to gender- and race-based pay inequities, salary expectations and fairness perceptions have risen to the forefront. Many employers are finding they benefit from addressing these concerns.

Avoiding Wage Compression

In many industries, labor shortages during the Covid-19 pandemic have led employers to try to attract new employees by offering wages comparable to those of tenured workers. When established employees become aware of the wage differential, they are likely to believe they are being treated unfairly. They may attempt to renegotiate salary or switch employers as a result.

Chipotle Mexican Grill anticipated this possibility when it was considering raising hourly workers’ pay from about $13 to $15 per hour in early 2021. The company did a careful analysis of how the change would affect hourly managers and salaried general managers, Marissa Andrada, the company’s chief diversity, inclusion, and people officer, told the Journal. As a result of this analysis, the chain included similar raises for these managers when raising pay for hourly workers.

Detroit-based Ally Financial reviews pay quarterly and boosts compensation when needed to ensure tenured employees aren’t being left behind. “It’s important in the spirit of pay equity,” the company’s chief human resources officer, Kathie Patterson, told the Journal. She noted that younger workers don’t hesitate to reveal their salaries to coworkers, “so making sure you have fairness and are able to justify and explain that is extremely important.”

Reducing Bias

Salary expectations and fairness concerns can also motivate employers to try to reduce the pay differential among workers—namely, when gender, racial, and other forms of bias have contributed to compensation inequities.

In her 2021 book, Just Work: How to Root Out Bias, Prejudice, and Bullying to Build a Kick-Ass Culture of Inclusivity (St. Martin’s Press), former Apple and Google executive Kim Scott urges managers to work to address such pay gaps. Because it is easy for bias to infect the salary negotiation and promotion process, Scott recommends that no individual be given unilateral power over compensation. Instead, she argues that for each position, companies should publish fixed salaries or salary ranges within which employees can negotiate. Greater transparency and more regulated compensation can help remove bias from salary negotiations.

Salary Expectations and CEO Pay

Another type of pay differential—between top management and rank-and-file workers—is also affecting salary expectations and fairness perceptions. The pay of top corporate executives grew 1,000% from 1978 to 2019, at nearly 100 times the rate of average workers’ pay, such that CEOs now earn 320 times more than a typical worker, according to the Economic Policy Institute. Scott calls on business leaders to reexamine such staggering pay differentials through the lens of fairness. “I’m not talking communism,” she writes. “I’m talking common human decency.”

Raising the pay of lower-level workers can have long-term payoffs. Costco, Best Buy, Target, and Amazon all raised their starting pay in recent years, according to the New York Times. Costco and Amazon say they have benefited from reduced employee turnover and higher morale. And with the goal of increasing employees’ “net disposable income”—the amount of money they have left after taxes and living expenses—PayPal raised salaries and the company’s health-insurance contributions for its lowest-paid workers. The result? Higher employee satisfaction and retention.

How have employees’ salary expectations affected negotiations and policymaking in your organization?