Several U.S. states have passed new fair-pay laws in the past year that could have dramatic effects on how salary negotiations are conducted in the workplace. Although the laws focus primarily on closing the salary gap between men and women, they have opened up a discussion about strategies that both employers and job candidates might try to increase the efficiency and effectiveness of salary negotiations.
The arbitrary nature of pay
In October 2015, California passed a fair-pay law that requires all employers operating in the state to prove that they pay both genders equally for “substantially similar” work, according to the Wall Street Journal. The law also makes it easier for workers to challenge the fairness of their pay. And if an employee files a complaint, employers are now responsible for proving they pay their workers equitably.
The law’s aim is to prevent gender bias from creeping into the salary-negotiation process to the disadvantage of women, who have long been paid less than men for similar work. But its requirements highlight the broader advantages that both employers and employees can gain from more structured and transparent compensation systems.
As it turns out, only 38% of employers have a formal compensation structure or philosophy underlying their salary decisions, according to a PayScale analysis of 7,600 firms, most of them based in the United States, Canada, and the United Kingdom. “When it comes to pay, most companies are making things up as they go along,” concludes Lauren Weber in a recent Journal article titled “Why There Is No Science in Your Salary.” Pay for salaried positions may be more arbitrary than pay for hourly positions, given that managers tend to have greater freedom to weight employees’ skill, experience, and performance when negotiating pay for salaried jobs.
Toward greater analysis
Spurred by fair-pay laws and a desire to show employees that they’ll be paid based on rational standards, more and more companies—a full 34% of those surveyed by PayScale—are adopting formal strategies for setting and negotiating pay.
Companies can set salary ranges based on factors such as industry standards and benchmarking data from independent firms, reports Weber. Organizations typically strive to pay at the 50th percentile of the range that similar employers pay for a given role, with leeway to move 20% below or above that amount based on an individual’s experience and skills, compensation expert Steve Gross told the Journal. Organizations competing for employees might set pay above the median; Web-services firm GoDaddy, for instance, starts talks with engineers at the 70th percentile of the market rate.
Weber describes how GoDaddy, which has 5,000 employees, recently overhauled its haphazard pay structure. The company mapped out job descriptions and created levels for each job title; each level has a pay grade with a wide salary range pegged at a market rate (for example, $101,000 to $165,000 for “Software Developer III”). Hiring managers discuss with job candidates whether their skills and experience warrant a salary at the bottom, middle, or top of the range. About 6% of GoDaddy’s workforce received salary increases to bring them up to the proper pay grade.
Should past pay stay in the past?
In August, the state of Massachusetts passed a fair-pay law that, starting in 2018, will prevent employers from asking prospective employees about their past salaries.
Because women often earn lower salaries than men in their first jobs, gender inequities can widen over time if employers anchor employees’ pay for each subsequent job on what they earned at their previous job. Preventing hiring managers from asking about candidates’ past salaries keeps them from factoring such potentially biased numbers into their offers. Google and the U.S. Office of Personnel Management are two organizations that now forbid managers to rely on an employee’s previous salary to set pay.
As a job candidate (whether male or female), how should you respond in an interview if an employer asks you how much you earned at your most recent job (if the question is legal in your state or area)? Ask whether the company has a formal pay-grade system that you should be consulting. Explain that you believe broader benchmarks offer a more accurate snapshot of what you’re worth now than what your previous employer thought you were worth in the past. In case no benchmarks are available, be sure you have researched pay for comparable jobs at your level, both at the company and in your industry, to help move the discussion in a more relevant direction.
The benefits of transparency
New fair-pay laws in Massachusetts, California, and Maryland all prevent employers from punishing employees who share information about their salaries with colleagues. Although organizations that engage in this type of retaliation against employees who discuss salaries with one another often are already breaking U.S. law, the recent state laws may help publicize the equalizing value of more transparent pay.
Employers often keep salary information under tight wraps because of the belief that employees’ awareness of pay differences will reduce morale and productivity and increase their demands. Yet evidence suggests that organizations are fighting a losing battle: Employees, particularly younger ones who are active on social media, are increasingly open about their earnings. Websites such as Glassdoor.com and Salary.com, where workers can post their salaries and other information about their jobs, have become a popular source of information for job seekers.
As the new laws suggest, greater salary transparency—whether in the form of employers making pay or pay ranges public or employees discussing their salaries informally—should motivate more analytical and fairer pay decisions. Salary transparency raises wages, Washington University in St. Louis professor Jake Rosenfeld has found in his research, in part by legitimizing employees’ arguments in salary negotiations and improving women’s wages.
That said, when salaries are made public, employees need to be aware of the common tendency to think that they deserve more than others. If you find out a colleague with a similar job earns more than you do, remember that she could have experience or responsibilities of which you’re unaware.
Toward more rational salary negotiations
The new fair-pay laws should motivate both sides in salary negotiations to navigate the process with greater foresight and analysis.
Advice for employers. Employers can improve salary negotiations with new employees by auditing existing pay practices to determine if decision makers are relying too much on intuition. The audit may lead organizations to standardize pay or to leave room for case-by-case negotiation within pay-grade ranges. When pay decisions and negotiations become more analytical, employers will benefit from more satisfied employees and from the knowledge that a significant expenditure—employee pay—is being determined more rationally.
Advice for would-be employees. For job candidates, the new fair-pay laws suggest that hiring negotiations will become more methodical—and leave them less at the mercy of employers’ sometimes random assessments of their value. You can help make your own salary negotiations more rational by researching pay thoroughly, both online and through your network, and by encouraging potential employers to analyze salaries for comparable hires rather than relying on your past pay as a benchmark.
Broadening the discussion.
Employers and potential hires alike can improve both sides’ satisfaction by broadening the compensation discussion beyond annual or hourly salary. Either side can suggest improving the candidate’s overall compensation package without raising salary by negotiating issues such as bonuses, shares in the company, retirement contributions, insurance plans, paid leave, and so on. By doing so, you may be able to reach a creative solution that avoids an impasse.