Paying: Why are new employees better paid?
We see this all the time, whether in big or small organisations; the pressure to give a high salary is felt most often when trying to get a new employee. Either at initial screening or job offer, its perceived (likely correctly, but we never know) that we will need to offer high in the range to get them to take the job.
It doesn’t make good business sense, it’s no end of problems, why would we pay them more?
The simple answer is to say don’t do it. But simple answers don’t get us far, so let’s discuss.
Status quo bias to existing employees
One of the most prevalent cognitive biases we see in many aspects of life is status quo bias, which (to put it simply) is when people show a bias to the state of affairs already in place over others-it’s not what they would otherwise choose, but they will stay with it because it’s familiar.
For existing salaries, both the company and the employee are more likely to stay with what’s been agreed than review and re-decide. This creates a certain rigidity, or stickiness to current salaries, often requiring a lot of pressure by the employee (and sometimes their manager) to get their salary increased, much more pressure than had the employee been a new hire and not a current employee.
New employees have more bargaining power because they aren’t expected to stay
New employees have greater bargaining power over salaries because no one expects them to stay. Again we see status quo bias coming into this, but an existing employee has more reasons to stay, whereas a potential employee can easily walk away from a job offer.
There are both practical and psychological reasons for this. Practically, a potential employee hasn’t arranged their life around this job- they haven’t arranged their childcare or their mortgage payments around this situation, they haven’t moved their phone number to the company account, and so forth.
Psychologically, potential employees haven’t made friends, haven’t established their client base, their professional reputation, or a good working relationship with their boss. An existing employee has all of these to lose, and therefore this stacked against them when weighing whether to leave their job if they don’t get more money.
External factors make it easy to give a new employee over the average
When it comes to bargaining a new salary, the average is often the starting point. Would you offer below the market rate, so you can offer more in the pay discussions? you might, but very very few would.
So this means the market rate is the starting point. Now most people don’t expect more, and quite a few won’t ask. But quite a few will, and when the average is the minimum, the starting point, it’s easy to get a situation where those that ask, get more.
Promoted employees most likely to be promised future adjustments that never come
Personally I really dislike this, and avoid it happening whenever possible, but it does happen, and when it does happen its particularly cruel.
When promoting someone into a higher role, it’s logical to offer them below the midpoint; they are green to the job, they were staying with the company on less money, so if reasonable and rational to pay them lower than average- if not them, then who? This I have no problem with.
Where things go wrong is one year later. After year in the job, the promoted employee is likely doing the job well, in full, as well as any external candidate, so logically they should move to at least 100%. But often this does not happen, and instead they are given a significant increase, e.g. 5% but this does not get them to 100%, maybe 98%. If this is fair to their value to the business, then sure. But often- 1,2, or even 3 years down the track they are the company’s best employee at that level, but often paid comparatively poorly, especially to newer, less proven employees.
