It's Time to Reinvent Salary Negotiation

Traditional compensation negotiation can unnecessarily burn cash and drive critical talent to the competition. Here are the common negotiation tactics that need to go.

Still negotiating compensation the old-fashioned way? It’s the draining ping-pong of numbers that starts with the pivotal question: What are your salary expectations? The job candidate’s answer is then followed by all the ways a company thinks it should pay less.

If you’ve accepted that scenario as standard, it’s time to reconsider. The status quo serves no one — especially in today’s labor market where 80% of tech workers and 65% of workers overall are looking for new jobs with compensation the top reason why.

Companies who engage in traditional salary negotiation face common pitfalls and mistakes. Learn where things typically go wrong so you can take the friction out of negotiation to:

• Better articulate the true value of offers
• End unintentional bias
• Build trust with candidates and employees

This article is based on our eBook, “The Essential Guide to Frictionless Negotiation” and our on-demand webinar “Is the Future of Negotiations None At All?” where I got to chat with Homebrew Head of People Beth Scheer and Candidate Labs COO & co-founder Michael Zhang. Some quotes have been edited for length and clarity.

Pitfalls of traditional salary negotiation

Aside from leaving people feeling icky, salary negotiation is bad for business, morale, and company culture for several reasons.

It’s a zero-sum game. Salary negotiation is typically an “I win, you lose” situation. One party has to give up a lot in order for the other to win — and it’s rare for the candidate to emerge the victor. It’s even less common for both parties to feel like what they got was fair and equitable.

It leads to false positives and false negatives. With the status quo, a worker’s compensation is tied to their ability to negotiate. That ability has nothing to do with the skills, experience, or value they’ll bring to the company. You can be a stellar engineer, but a terrible negotiator. That means low performers can get paid too much, and high performers can be undervalued. We need a more level playing field.

It relies on broken communication. Nothing is as infuriating to candidates as ghosting and long periods of silence after a flurry of activity, praise, or even counteroffers. If you’re a serial ghoster, beware: The tables are turning as 84% of U.S. job candidates admit they’ve ghosted an employer, potential employer, or both.

It maintains pay disparity. 73% of U.S. employers expect a salary negotiation on an initial job offer, but only 45%of candidates actually ask for a higher salary. Among those who do negotiate, not all are successful.

It’s common knowledge that men fare better in negotiations than women, and women of color are even less successful. As a result, negotiations can uphold the pay gap where a woman earns $0.82 for every dollar earned by a man. That difference could mean up to $2 million is lost wages over a lifetime for some women.

Common salary negotiation mistakes

Many negotiation mistakes happen long before your first contact with a job candidate. Here are the top missteps to avoid.

Lacking a clear and aligned definition of roles

“The number one thing that I tell founders over and over is when you think about compensation and negotiation, you have to think about comping the role, not the person, “ says Beth Scheer, head of talent at Homebrew, a seed stage venture capital firm.

Before going to market with a new job, Scheer recommends founders and hiring teams write job descriptions and go through a job leveling exercise. Job leveling is the process of structuring a role into different levels of competency, responsibilities, and seniority. For instance, the role of engineer can have several levels including engineer, senior engineer, or lead engineer.

Job leveling is the process of structuring a role into different levels of competency, responsibilities, and seniority. For instance, the role of engineer can have several levels including engineer, senior engineer, or lead engineer.

“When you have a founder who just starts interviewing people before actually setting the basic foundation, you’re going to have a big problem,” Scheer says.

Further, it’s important for executives and the hiring team to have a firm alignment on a role, says Michael Zhang, COO & co-founder of Candidate Labs, a search firm for high-growth companies.

A framework Candidate Labs uses to define a role revolves around three areas: mission, outcomes, and competencies. This helps clarify job levels, the intended impact of the role, and whether a candidate is a good fit.

Not having a compensation philosophy

A compensation philosophy is another negotiation essential that must be in place before you begin to hire for a role.

A compensation philosophy is a written statement that explains how your company plans to pay and reward its employees based on goals, finances, stage of growth, and location.

A compensation philosophy is a written statement that explains how your company plans to pay and reward its employees based on goals, finances, stage of growth, and location.

Here’s an example of how a company could articulate its compensation philosophy:
We plan to pay everyone in the 70th percentile based on San Francisco benchmarks, regardless of their location.

To get a true picture of the market, your compensation philosophy must be based on fresh, verifiable comp data from companies in your industry and similar stage of growth.

Presenting an offer without context

Candidates typically enter a hiring process with salary expectations based on things like their previous salary, bad comp data from the internet, and the faulty advice of peers. Rarely are their expectations based on relevant comp data.

Even a fair and highly competitive offer can fall flat if the candidate’s expectations are widely off mark.

To avoid misinterpretations of your offer, always present it with context. Explain where you got your comp data, the pay range, and your compensation philosophy. Pay ranges (aka salary bands) set the salary boundaries for a role or group of roles—with a low, midpoint, and high amount. The midpoint is the anchor to your compensation philosophy. For instance, if you intend to pay at the 75th percentile, the midpoint will reflect this.

Pay ranges (aka salary bands) set the salary boundaries for a role or group of roles—with a low, midpoint, and high amount. The midpoint is the anchor to your compensation philosophy. For instance, if you intend to pay at the 75th percentile, the midpoint will reflect this.

When it comes to equity, don’t assume candidates know how it works. Explain the long-term value of equity and the benefits of joining and growing with your organization.

Overpaying just to get a yes

It can be tempting to make an exception to your compensation philosophy or pay ranges to win talent that’s essential to reaching the next level. But consider the potential consequences of those exceptions and whether they’re worth the risks, especially given today’s economic uncertainty.

For example, if you pay a new hire more than the upper limit of their role’s pay range, when it’s time for a promotion you won’t be able to give them a meaningful raise because they’re already in the salary band for their new role.

So you could end up giving them a 2% increase with the promotion and that doesn't feel good. Worse yet, an employee in that situation is likely to quit. This applies to equity, too.

“We see a lot of early stage companies pick equity numbers out of thin air at times,” says Zhang. “So a lot of the coaching we do centers around really getting them into a more comp data-driven methodology, and helping them put a dollar value on equity and painting a scenario for what that future dollar looks like.”

A better way to manage salary negotiations

As you address common negotiation pitfalls and mistakes, an easier process with less friction can emerge.

“I think compensation negotiations will continue but they can be simpler,” says Zhang. “I think there's a future where this can be far more comp data driven and transparent.”

By leading with comp data, it’s never about a person’s worth. You can focus on your needs for the role and a person's experience, skills, and abilities and find the place where both sides benefit.

Want to learn how to create frictionless, data-driven salary negotiations?

Download our eBook, “The Essential Guide to Frictionless Negotiation.”

Watch our on-demand webinar, “Is the future of negotiation none at all?”

Ashley Brounstein is Sr. Director of People at OpenComp. Prior, she served in customer experience, product, and people leadership roles at high-growth companies like Redfin and D2iQ. Connect with her on LinkedIn here.