No Salary Negotiations Allowed

Some companies have banned haggling over salary, but there may be better ways to close the gender pay gap.

By Joanne Sammer Sep 1, 2015
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When Bill Balderaz launched Fathom Healthcare in 2006, he made an unusual decision: The company would not negotiate salaries during the hiring process. Negotiation “starts the relationship on a note of distrust and dishonesty,” says the former president of the Valley View, Ohio-based company that provides marketing services to hospitals and health systems.

“Even if you meet halfway, both parties can feel like they lost out,” Balderaz says. “The candidate thinks he’s working for less than he’s worth, and the company feels like it is paying too much.”

Balderaz believes that banning salary negotiations is fairer to employees. “Some people are better negotiators than others, and that does not necessarily translate to the quality of [their] work,” he says. “Unless you are hiring someone to be a negotiator, then it shouldn’t matter.”

More recently, in April 2015, Reddit made headlines by announcing that it would prohibit salary negotiations for both candidates and existing employees—but for a different reason. The San Francisco-based Internet news company, which has about 70 employees, adopted the policy in an attempt to close the gender pay gap. Several other tech companies, including Jet.com and Magoosh, have recently implemented similar policies in an effort to pay fair and consistent salaries.

The fact that Ellen Pao, then interim CEO of Reddit, had just lost a high-profile gender discrimination lawsuit against a Silicon Valley venture capital firm gave the announcement particular significance. Three months after the announcement, Pao resigned from Reddit under pressure, with some lauding her as a crusader against sexism and others charging her with mismanagement during her controversial eight-month tenure.

Regardless of Pao’s troubles, Reddit says it has no intention of dropping the policy, and a company spokesperson claims there has been an uptick in applications received since the announcement was made. In explaining the no-negotiation policy, Pao noted that women tend to settle for the salary they’re offered, leaving them at a disadvantage. And when they do negotiate, they are often viewed negatively by others in the company or industry.

But some think banning salary negotiations may be harmful to women. “The rhetoric about having to help women along because they are not good at negotiating reinforces that stereotype and can really penalize women down the line in their careers,” says Catherine Tinsley, a professor at the McDonough School of Business at Georgetown University and executive director of the university’s Women’s Leadership Institute in Washington, D.C. The notion that women are poor negotiators is just not true, she says.

While salary negotiation bans can and do work for some companies, the number of organizations with such policies is small and likely to stay that way. In fact, talk among compensation experts often quickly moves away from all-out bans to the possibility of creating a fairer negotiation process for everyone, with clear expectations and positive outcomes for all. That requires greater transparency about pay levels and how employers make compensation decisions. By taking a slightly different approach to pay conversations, organizations have an opportunity to ensure fair and appropriate compensation for all employees.

The Wisdom of a Ban

Few would argue that gender pay disparities aren’t real. The latest data from the U.S. Bureau of Labor Statistics show that women’s median weekly earnings equaled 82 percent of men’s in 2013. That’s an improvement from 1979, when women earned just 62 percent of what men do, but there is still some distance to go to close the gap.

The effect of this disparity can multiply over the course of a woman’s work life. “Even a small $5,000 difference at the beginning of your career is going to have hundreds of thousands of dollars of impact by the end of your career when you recognize that each bonus, raise and even company retirement plan contribution is tagged to that initial salary,” says Fatimah Gilliam, founder and CEO of The Azara Group, a leadership consulting company in New York City.

While HR should remedy unfair pay gaps of any kind, many compensation executives doubt the effectiveness and viability of Reddit’s approach. “As far as I’m concerned, this is in the same category as Donald Trump running for president: a way to get attention,” says Randy Keuch, head of total rewards-Americas for Teva Pharmaceuticals, which has 33,000 employees.

Real-World Considerations

Salary negotiation bans are not new. Jobs covered by union contracts and step-rate programs, for example, have long negated candidates’ and employees’ ability to negotiate their pay. But that approach may not fly in today’s competitive talent market. Without the ability to negotiate their compensation, high-performing employees are more likely to look elsewhere, even if they are not initially put off by such a ban. “People need a compelling reason to join a company, and then they need a compelling reason to stay,” Keuch says.

While employers that have banned salary negotiations say doing so helps strengthen the relationship between employer and employee, most experts believe it does the opposite. “If you are basically saying everybody gets paid the same thing no matter what, employees might wonder what will happen in year two of the employment relationship if they are particularly strong performers,” says Ken Abosch, compensation practice leader with Aon Hewitt in Lincolnshire, Ill. Employees may be wondering “Am I going to be told that there’s no negotiating then either?”

HR and compensation executives know better than most what’s at stake if an employer can’t meet the needs of critical talent. “If a strong candidate will not agree to less than $135,000 and you have offered $130,000, are you really going to let the candidate walk over $5,000?” asks David Kirby, an HR veteran who has overseen compensation policies at a number of companies. This is why companies often build in wiggle room when recruiting.

For compensation professionals, such real-world considerations are significant. “There are always going to be some people who are paid at the high end of the range and some people at the low end of the range to reflect years of experience, higher or lower performance, and what they bring to the table,” says Linda VanDeventer, director of compensation consulting with Buck Consultants in Chicago.

Salary Bans in Practice

Employers that have banned salary negotiations recognize the importance of keeping pay tied closely to competitive market rates in order to attract and retain top talent. Here is a closer look at how a few of these organizations manage this approach.

Company Type of Company Number of Employees Reason for the Ban Negotiation Banned for How It Works
Reddit
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Internet news company headquartered in San FranciscoAbout 70To help close the gender pay gapCandidates and employeesEmployees are offered competitive compensation packages with a choice of pay mix that includes cash and equity.
Fathom
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Health care marketing firm in Valley View, OhioAbout 40To provide fairer compensation and to build a healthier employer-employee relationship across the boardCandidates and employeesSalaries are pegged to the top quartile for the company’s geography. The company benchmarks frequently against salary surveys.
Duart Mill
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Private equity firm based in Atlantan/aTo ensure pay equity at the executive levelExecutive-level candidates from companies in which Duart Mull has a stakeSalaries are set at the 80th to 90th percentile to get qualified candidates. Offers and incentives provide an additional payout of up to one-half of salary, depending on individual and company results.
      

And banning salary negotiations doesn’t necessarily result in pay equity, anyway. An HR professional or individual manager could still make higher salary offers to men or other preferred candidates. Companies can hope to address pay gaps only when salary negotiation bans are accompanied by preset salaries for specific positions. Yet that approach doesn’t allow an organization to adjust pay based on prior work experience, education or likelihood an individual will excel in the position, Abosch says.

Negotiating, but with a Twist

Employers that are leery of banning salary negotiations have other options to ensure fairer negotiations for all candidates and employees. To level the playing field, try the following:

Make the negotiation process more understandable and egalitarian. After all, pay gaps do not just affect women. Black and Hispanic individuals are also paid considerably less than their white male counterparts. Being clear about how negotiation works and offering everyone the same information and training on the process will help all employees secure appropriate compensation for themselves.

Communicate your expectations. Ambiguity surrounding the negotiation itself, such as what is negotiable and whether it is appropriate to negotiate at all, may cause difficulties, Tinsley says. Considering all of the variables that could potentially come into play during candidate negotiations—including everything from variable pay and paid time off to retirement benefits and flexible work arrangements—it would be helpful to set parameters for these discussions.

Treat people respectfully. Ultimately, however, a successful negotiation is almost as much about how the process is handled as the end result. “People care less about absolute amounts of money than about being sure that they are not underpaid relative to others,” Tinsley says. “It is also extraordinarily important that people feel that they were treated well and with dignity. In fact, they will sacrifice money if the process has this type of high ‘procedural fairness.’ ”

Get transparent. At the onset, though, negotiation is all about information—who has it and how they use it. Therefore, employers that are serious about closing pay gaps and leveling the negotiation playing field should consider being more open about compensation in general and compensation decision-making specifically. “What is going to close the gender wage gap is [salary] transparency,” Tinsley says.

Transparency Is Power

While many public-sector employers have long been required by law to release salary data, private companies increasingly are facing pressure to be more open about compensation. This trend is largely driven by Millennial employees who are accustomed to having access to whatever information they want whenever they want it.

In fact, many young candidates may balk at a negotiation ban. “Millennials want to feel like they control their own destiny,” says Mykkah Herner, a director of professional services for PayScale Inc. in the Seattle area. “I think they want that dialogue.”

Social media company Buffer has embraced complete compensation transparency by, for example, disclosing its formula for determining pay levels and the amounts and mix of compensation employees receive. The company publishes its open equity formula online, including an explanation of each element used to set pay and equity levels and a spreadsheet listing the compensation levels for its 37 employees, as well as salary and equity formulas and calculations.

Of course, not every employer has to go that far. “Employers can conduct a market pay study and share the results of that,” Herner suggests. They can also share the organization’s compensation philosophy as another first step toward greater transparency, he adds.

The important thing is to start the conversation about pay programs. “Increased transparency is what will enable people to better price themselves relative to their peers and what is going to enable women and people of color to know whether or not they are being underpaid,” Gilliam says.

Without this transparency, candidates have to research their own compensation data, which keeps them at a disadvantage. Online pay data that is available free to anyone is often self-reported by individuals and not necessarily a reliable indicator of what the market pays for a specific job. Yet providing at least some accurate information about compensation to candidates and employees is crucial in the interest of fairness.

If the pressure to increase salary transparency continues to mount, employers need to be ready to open the books. “Organizations need to find ways to make sure their compensation programs are credible and defensible enough that they would be willing to communicate about them in more detail,” Abosch says. Once they do that, he adds, the next challenge is to provide that information in a structured and understandable way.

Tread Carefully

It’s unlikely that Reddit’s attention-getting salary negotiation ban will inspire multitudes of employers to adopt similar policies. But the no-haggle approach might make sense for some companies. If you’re interested in trying it, Balderaz of Fathom Healthcare offers two pieces of advice.

First, determine what “fair pay” means in dollar terms and then add 10 percent to it. “You want to stay toward the higher end of your market for you or for the job and for the geography,” he says.

Second, do not allow exceptions to the policy. “Sometimes, people don’t believe it and still want to negotiate,” he says. Fathom learned this the hard way. When an employer starts making exceptions, employees will “wonder why you did not stick to your word. [The ban] is an all-or-nothing proposition,” Balderaz says. The company, which has about 40 employees, made a couple of exceptions to its salary negotiation ban early on and later regretted each one.

Overall, though, the ban has not had a negative impact on recruitment at Fathom, as the company has made 60 or more hires for positions at different levels and with varying skill sets since its launch and has had no trouble attracting candidates, Balderaz says.

Salary negotiations aside, employers can also closely evaluate their pay programs, with an eye toward eliminating bias and addressing any shortcomings. For example, organizations can regularly examine and compare male-dominated and female-dominated roles to identify similar responsibilities and skills. With that information, it becomes easier to see whether current compensation programs and pay levels reflect those common duties, regardless of salary negotiations. “Any differences in pay should only exist due to differences in performance and contributions,” rather than gender or any other characteristic, Abosch says.

Compensation fairness continues to be a thorn in the side of many employers. Despite years of efforts to address pay gaps for women and some minority groups, these gaps persist. A new approach based on clear expectations and greater information-sharing could succeed where other methods have failed. This time, the motivator for change could come from candidates and employees who want to know once and for all that they got a fair shake.

Joanne Sammer is a New Jersey-based business and financial writer.

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