Why are new employees better paid?

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It shouldn’t happen, but it does. So let’s take the ‘shouldn’t’ as read, and talk about why.

We see this all the time; 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, it’s perceived (likely correctly, but we never know) that we will need to offer high in the range to get them to take the job.

But we can see across all of the comparable salaries,  we can see this will make them one of the highest paid, which is not particularly rational, given their value to the organisation is uncertain.  They have potential, but are unproven, so why would we pay them more? 

Status quo bias with 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 we would otherwise choose, but it stays, 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 there are no loyalty expectations

New employees have greater bargaining power over salaries because no one expects loyalty. Them asking for more is not seen as disloyal. I agree it shouldn’t be, but (as above) it is. Again we see status quo bias coming into this. But also, 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. An existing employee has more reasons to stay, whereas a potential employee can easily walk away from a job offer. 

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. So this means money is less of a reason to go, and more of a reason to come.

Internal factors make it difficult to get an existing employee much beyond 100% of midpoint

Most rem systems have a heavy central tendency, or a very steep bell curve.

This isn’t always the case, but happens often when an organisation’s remuneration system use any form of banding that has a midpoint.  100% of midpoint for salary means you are paying the average salary for the role, this roughly means the employee is giving an average value back to business.  Very often employees who have been with us for more than 2 years are our best workers, giving well above average value, and are key assets we want to retain. 

But there is often a real resistance to giving these employees significant increases to reflect this- often is it struggle to give them 2-3% increases, whether due to financial prudence, central tendency bias or many other reasons.  Often at most you only get a 3% increase, shifting them from 100% to 103% of midpoint.

External factors make it easy to give a new employee over 100% of midpoint

Compare the above to getting a new employee over 100% of the midpoint, which can be comparatively easy. 

Firstly, the labour market is highly subjective- both to the employer, and the candidate, so whether the candidate could get more elsewhere is an ever-present and unanswerable question, which places upwards pressure on the salary.  The ‘grass is greener on the other side’ distort also makes it easier for us to believe that we are competing with bigger numbers.

Secondly, most recruitment processes don’t end up with 2-3 equally viable options to the employer, but instead one person they’ve now set their heart on. This anxiety of missing out, and the trepidation of starting again makes it easier to justify another 5% for that person. 

Promoted employees will likely be promised future adjustments that never come

Personally I really dislike this, and avoid it happening whenever possible, but it definitely happens a lot.  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 the green and newly promoted, then who would be paid below the average?  This I have no problem with.

But; 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.

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