#YourCareer : How Understanding Compensation Can Help You Negotiate Better Pay. Great Read for All!

With 10 U.S. states enacting some form of pay transparency legislation, there is growing momentum towards achieving pay equity. Because there isn’t yet a federal-level view, companies are responding in different ways, and none yet seem to have moved to full nationwide pay transparency. Despite that, job seekers (and employees negotiating pay raises) now have more information than ever before, and understanding how to interpret publicly available data, and how that fits into corporate compensation structures, is critical to making the most out of salary negotiations.

What Is A Compensation Philosophy?

Compensation teams (also frequently called Total Reward teams) conduct the highly-technical heavy lifting around pay and benefits, though their work is always anchored to an overarching philosophy. It is rare for companies to publicly articulate their compensation philosophy (with NetflixNFLX -1.2% being a notable exception) but understanding that there is one is foundational in thinking about your own pay. For most organizations the pillars of their philosophy can be best articulated by two factors: how they think about cost, and how they think about market positioning.

Many organizations take a “cost of living” approach and anchor their pay to that data set, but equally some organizations take a “cost of labor” approach and anchor their pay to that (often lower) data set. From there, companies decide where they want to position themselves. One of the Fortune 500 companies I worked at had a “market median” philosophy (i.e. pay was anchored at the 50^th percentile) and another took an “upper quartile” approach (i.e. pay was targeted to be higher than 75% of our competitive set).

Why does this matter? Companies make deliberate choices about where they set pay, so seeing that the same job pays more in a different company is a limited-value data point in isolation.

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What Is Pay Architecture?

Inside large organizations there are three core components to how base pay is calculated, and salary bands form the foundation of this structure. Salary bands run horizontally across the enterprise, and it is not unusual for a large organization to have 16 bands running from entry-level at the bottom up to the CEO at the top (so if the CEO is band one, their direct reports are band two, and entry level are band 16).

Pay bands are typically quite broad, and they are designed to overlap: so if pay band 16 is $25,000 – $75,000 dollars, then pay band 15 will be $50,000 – $100,000. The core philosophy here is that the midpoint of the pay band is the point at which someone is fully proficient in the role, so while pay band 16 stretches from $25,000 to $75,000, most employees in that band will be sitting at or around $50,000. Modern compensation philosophy also relies on “compa ratios” which look at both the spread of employees in the band, and their positioning in relation to the midpoint, with guardrails around where pay can begin and end.

So while pay band 16 technically runs from $25,000 to $75,000, almost all employees in that band (especially in a larger organizations) will have their salaries fall in a range from $42,500 to $55,000 (or from a 0.85 compa ratio through a 1.10 compa ratio). The underlying philosophy here being that by the time you get to a 1.10 compa ratio you are performing beyond expectations in every area of the role and are ready for promotion (indeed at that point your salary is already beyond the starting point for the next pay band).

In addition to pay bands running horizontally across the organization, roles are organized into “job families” which run vertically, and each job family will have unique pay bands: so in this example, pay band 16 for marketing is $25,000 to $75,000 while pay band 16 for technology could be $40,000 to $90,000. Lastly, for very large organizations that operate multi-state or multi-nationally, there is a further “market zone” qualifier which sits on top of the pay band and job family. It is totally typical for the same job in the same company to pay a higher salary if the job is based in San Francisco versus being based in Chicago, for example.

Why does this matter? Because we’re still in a patchwork of pay transparency laws, and nothing has really been tested yet, companies have choices to how they respond. Some companies are posting their full band ranges, and some are posting partial ranges. Some companies are only posting ranges in places where they’re compelled to (eg. California and New York). Therefore, when you see a wide range of salary data, it’s only telling part of the story, and almost never means you can expect the role to pay at the very top of the range.

Why Do Companies Talk About Total Reward?

Put simply, base pay is only part of the compensation packages large corporations offer. Earlier in your career you can typically expect base pay to represent 90% of your earnings (with variable cash bonuses and benefits such as healthcare and 401k matching making up the rest). As you progress through your career that ratio shifts, with senior managers typically seeing 70% of their compensation in base pay, and the rest comprising variable cash and equity bonuses. At the other extreme end of the spectrum CEO pay is typically 10% fixed base pay, and the rest entirely variable or “performance based.”

Why does this matter? Wherever you are in your career, thinking holistically about compensation is a paradigm shift that will unlock long-term value. Furthermore, moving beyond focusing solely on base pay and thinking about offers in their totality can give you more leverage in a negotiation. Salary is often the least flexible component (in part because of all the factors detailed above), so looking to maximize other parts of the offer can be an easier win and can land you with an offer that is higher when all the variable cash and non-cash elements are combined.

How Are Offers Formulated?

Before recruiters even open a role and start sourcing candidates there is typically an “intake meeting” between the hiring manager, the HR business partner, and the recruiter. For senior level roles a compensation specialist usually attends that meeting too. Before the go-to-market process begins, the HR business partner will look at the available budget for the role, and the median salary of all the incumbent employees in the same role (this process is called maintaining internal equity). From there the hiring manager and recruiter have a clear idea of the parameters they can work with.

Why does this matter? Once you are engaged on a role recruiters will want to try to pin down your salary expectations – this is because they already know the range they can work with, and the genuine reason is that they don’t want to waste your time if your expectations don’t fall within what they can reasonably expect to be able to offer. It’s also important because offer exceptions are incredibly rare, so two-way transparency is really key when you’re working with a recruiter. There’s nothing worse than getting to the end of a recruitment process and finding that we cannot, in fact, meet the candidates’ salary expectations.

Can I Negotiate And Where Is There Flexibility?

The short answer is yes you can, but you need also to remember that if you negotiate too hard, or are too unrealistic, companies can (and will) withdraw the offer. For all of the reasons detailed above, base pay is going to be the part of the offer that has the least flexibility, and most recruiters have already negotiated the maximum they can for you (it’s in our interest to get you the best offer we can, because you’re more likely to say yes, and that is one of the core metrics we’re measured on).

While you may be able to get an additional 5-10% added to the base pay, the greatest degree of flexibility is to be found in cash bonuses and equity. If accepting the role will cause you to lose out on a bonus or equity or 401k vesting, it is common practice to offer a cash signing bonus to offset this loss. The caveat here is that a signing bonus should never be used to offset a differential in base pay, because it’s designed to be a one-time intervention.

Where there is an equity component to an offer, factoring in the vesting horizon is another easy way to increase the total offer. For example if an offer includes $50k of RSU’s that vest 33% each year, it can be totally reasonable to ask for a triple stock grant, so that you’re “fully vested” within 12 months, so that your total earnings don’t dip down in your second year of employment. Lastly don’t forget the significant extra value that can be found in additional PTO, healthcare coverage and education stipends. These too are often an easier sell than increasing the base pay amount.

Although pay is still considered highly personal, and your individual circumstances will guide how and what you negotiate for, greater transparency in this area will start to drive more equitable outcomes for everyone. Becoming literate with corporate pay structures and mechanisms is a critical first step in unlocking long-term wealth building in your career.

Forbes.com | March 13, 2024 | James Hudson