Your comp questions answered: how companies can approach compensation negotiationFeatured

Hi Everyone! I'm going to be writing about pay and compensation here each month. The last few months, I talked about negotiating pay from an employee perspective. This time, I’m going to focus on how companies can approach compensation negotiation. ( Reminder: send me more questions, either here in the comments or via message! I want to make this useful to you all. )Setting policy: To negotiate or not to negotiateThere are lots of downsides to negotiating compensation, particularly for companies that value fairness and pay equity. Lots of people are not comfortable negotiating, depending on their cultural background and personalities. But women in particular are frequently penalized for negotiating pay, and “just be more assertive” can lead to backlash against a candidate. Given all of this, why do companies negotiate compensation in the first place? - Companies generally care a lot about budget and want to avoid overspending. This means they probably don’t lead with their top offer. - Hiring is a difficult (and often emotional) experience, and you don’t want to lose someone amazing just because you were 5k short of closing the deal. - If you lose someone who could be a great hire, you’re going to be continuing an expensive process of recruiting for that role instead of getting onto other business. - And finally the biggest reason – everyone else is doing it. Candidates often expect to negotiate, and if they’re surprised that the offer does not match their expectations but you won’t budge, you’ll lose them — in addition to the time and energy spent getting them to offer. So how can a company negotiate pay and not mess it up? Let’s assume for whatever reason that your company, like most companies, negotiates pay when making an offer to a candidate. The process is far riskier for the candidate than the company, but there are plenty of mistakes that companies make during negotiations as well. It’s in everyone’s best interest for the company to set some guidelines and avoid common traps.Keep your eyes on the prize. The goal of every hiring negotiation is finding a mutually beneficial arrangement. Your focus isn’t just to spend as little as possible; it’s to get someone who is happy and excited to join your company, where both parties feel like they got a fair deal. If your budget is far from someone’s pay requirements, then make the best case you can for why the company offers great opportunities... and then let her go. Resist the temptation to give “our perfect 10x engineer” a big bump over your budget. (If they’re really that amazing, hire them at the commensurate level.) Creating a big pay disparity in the team to land a new hire has implications for your budget, future hiring, and intra-team dynamics. Eventually, it will come out that one person is paid significantly more than their peers, and you can’t get that trust back once it’s been lost.Pay transparency starts early.One of the best ways that you can help ensure you’re being clear with candidates from the beginning is to post your pay range for a role with the job listing. Not only does this save you the problem of interviewing candidates you can’t afford, but it also helps the candidate immediately feel like they have an idea of what you’re looking for. In California specifically (and coming to other jurisdictions in the future, I suspect), you are legally required to provide the pay range for a role if a candidate asks for it. So why not take the next step and post the range along with the job opening?Additionally, you may want to use a subset of the total range for a role as the target hiring range. It’s generally not ideal to hire at the very top or above range (though we’ve all been in situations where we choose to do so anyway – don’t make it common!). You want the employee to have some room for a raise before they’re forced to seek a promotion, and if you hire them into the very top of the range they’re starting out red-circled. Fast-forward a year and you’re having some very difficult conversations with the manager, trouble that can be avoided with early planning. So for example, if the total range for an engineering role is 128k-150k, you may want to set your hiring target range from 132k-140k. Even if you decide to go to the very top of the hiring range for a candidate, there’s still room to reward and recognize great performance during the next review/raise cycle. But if you hire at 148k (closer to the top of the total range), you don’t have as much room to reward a great hire in their first review cycle.Set some boundaries.Being transparent helps your candidates (and hiring managers!) understand the guidelines your company uses to set compensation. But you also need to be consistent, and consistency means setting some boundaries and keeping to them. If you include stock as part of employee pay, be clear about ranges for both cash and equity. When it comes time to negotiate compensation, don’t let either one of those move too wildly away from the center. Some companies let candidates decide if they want to take a higher-cash/lower-stock or a lower-cash/higher-stock package. This helps the candidate feel empowered, but without some boundaries it can go awry. Only those who can afford to take risks will potentially reap the longer-term higher rewards of greater stock grants. If you’re going to let employees go up higher on stock and lower on cash (or vice versa), don't let too much drift exist between the highest and lowest versions of the packages. I recommend no more than a 10% +/- on cash and stock wiggle room, depending on the stage of the company. Always remember: people talk.When you’re tempted to make an exception to your general practices, never forget that eventually that exception will become known amongst your employees. People talk. They talk about pay and compensation, raises and performance, and how they feel the company is treating them and their colleagues. So giving that outsized package to someone you want to close in the heat of a negotiation will often backfire. Ask yourself: is this one person worth risking the overall productivity and trust within the team? Sometimes, you can sincerely believe the answer is “Yes!” – but at least remember to ask yourself the question. Then you’re making a deliberate choice, and not backing into the decision. One more thing I want to mention here and let’s be honest: some companies really do encourage hiring managers to “get a good deal” and pay people as little as possible. It’s not the most common approach to employee pay (really!), but it is out there. If your company takes this position – which I very strongly discourage – you have an even greater need to be as consistent as possible in your pay practices. Hiring at the lowest rate you can “get away with” is already eroding trust amongst your employees, and any pay disparities will have even greater negative consequences.