New Research Might Explain Why Companies Won’t Play Ball on Junior-level Salaries

October 3, 2016

 

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Salary negotiations are one of the most exciting – yet tense – parts of the recruitment process. As a boutique recruitment agency, we often act as the intermediary for negotiations between candidate and company in the home stretch of a hire. It’s exciting because there’s the prospect of a successful placement, with a happy company and a happy candidate – yet tense, because there’s always the possibility of deals falling apart if a candidate and company can’t agree on salary.

It happens. Every recruiter has a story about that perfect placement failing to materialize because of issues that come up during these negotiations. The company is unwilling to add vacation days, they can’t agree on the start date because the candidate is on a contract and wants to work an extra week, the candidate takes another job offer and poof — the work we’ve put into finding the perfect candidate, the work the company put into interviewing, the work the candidate put into polishing their resume, preparing for interviews, dressing to impress, goes up in smoke.

There’s one strange aspect of this phenomenon that’s always puzzled us: it seems like, more often, these tensions and difficulties in salary negotiations happen at the more junior end, for candidates with 3-5 years of experience, than for director, senior director or executive-level salaries. You’d think a company would be more punctilious about benefits that add up quickly when it comes to executive compensation (car allowances, bonuses), but it seems like more often the hiring process gets stalled with salary issues for junior candidates. We often wonder: Why is a company sometimes more willing to add a five-figure car allowance onto a $160,000 salary than they are to add $2,000 onto a $50,000 salary?

One take is that a senior director or executive is both highly sought-after and highly respected. Companies are willing to play ball on salary because an executive’s track record speaks for itself. That’s definitely a part of the equation, but some new behavioural economics out of the California Institute of Technology offers another possible roundabout explanation for this phenomenon.

Just follow us with this one for a second:

The New York Times Upshot blog posted a fascinating article about consumer shopping habits, and it sheds light on some psychology that might help explain companies’ willingness to haggle over a junior salary more than a senior one.

The basic observation is that consumers often spend more time and effort pursuing savings on inexpensive items – say, a sweater – as they do on more expensive items – say, a car. The reason? The human brain tends to think of savings in relative, rather than absolute dollar amounts. So 30% off a new pair of jeans seems like a savings accomplishment, even if that amounts to $15, whereas with a big-ticket item like a new flatscreen TV or car, we’re more likely to pay for add-ons, or go for the larger model. Your brain is able to convince itself that extra spending on an expensive item is insignificant relative to the total cost. To quote the NYT: “Once you have gotten started, substantial sums can feel small. If you have remodeled your home recently, this may be painfully familiar.”

 The author compares this psychological tendency to lifting a heavy object: we’re more likely to notice an extra five pounds added to a bag that’s almost empty than we are to notice five pounds added to a packed suitcase.

So what’s the relevance for hiring? Maybe hiring managers’ minds work the same way when they’re negotiating salaries. Maybe a bump in salary seems like less of a hit on the company’s bottom line when they’re already offering $150,000 a year. Maybe an extra $2,000 feels like a bigger increase when it comes to paying a candidate making $50,000 than it does to an executive. But in absolute terms, it’s the same.

So what’s the takeaway? In our opinion, hiring managers need to try to think in terms of absolute costs rather than relative costs, because securing that great candidate at the junior end can be hugely impactful to the long-term success of your organization. Every company can be expected to play a bit of hardball, but it’s worth putting small increases in salary in perspective – especially if it rescues a great hire, as well as the huge investment of time and labour it takes to make it happen.

Some food for thought. And if you’re a hiring manager and you disagree, you at least have to acknowledge that the behavioural economics is fascinating! logo_icon

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