Authored by: Principal Consultant, Jennifer Tarnowski
Authored: November 2021
Edited: August 2022
Maybe you saw some higher salaries online matching your job title or found out that someone else at a different employer who does similar sounding work has a higher salary. Now before going all gung-ho trying to negotiate with your current employer, it might be worth taking a step back to assess the situation. Here are a few tidbits from someone who had to tell all those eager negotiators that pay increases are frozen or fixed for X, Y, Z reasons or had to outright deny those requests simply due to the company’s compensation structure.
Connection Between Org Structure and Limiting Factors
First off, it would be wise to understand the overarching environment of your employer. Is it a private, self-funded company? Is it privately held, but taking outside investment from private equity groups, which means they have strict financial obligations to return a specific % return on investment (ROI) to those investors? Is it a publicly traded company, which has obligations to return money to investors through the stock market? Did your employer recently go through a merger or acquisition? Is it a non-profit that experiences budgetary shortages when donations, grant, and/or government funding fluctuates? Is it a government entity with budgets set by allocations from tax dollars?
The answers to all of these questions have an impact on how likely it is that there is money “left over” for unscheduled salary increases. It also has an impact on whether or not the financial or accounting team for the employer even permits salary increases that are decoupled from career-related movements such as changes in title and/or role. Compensation structures, which affect the ability and/or timing for employees to negotiate salary increases, vary wildly and are tied to organizational structure.
The Financial Reality of Different Org Structures
Private companies that are funded with business loans or have enough cash on hand to cover all annual expenses and still have a net income are more likely to have money available for unscheduled pay increases that make good business sense. Key word, good business sense, aka not just asking your employer for more money because your personal situation changed and your personal expenses increased. This is where you justify your worth in terms of what you bring to the workplace – exceptional performance, client connections, niche skills that would be difficult to replace or train, etc.
Private companies that have obligations to investors may not always tell their employees how much they actually owe back to investors, or the expected additional % of ROI for the investors to turn a profit. However, if management and HR seem very squirrely about money, that might be a good indicator that they are under strict pressure to perform financially and they need an exceptionally compelling reason to do an unscheduled pay increase. If they give vague answers or even seem offended when people ask for more money, they might be in dire straits to meet goals set for them by investors and the board of directors. They may even be actively cutting expenses in other areas that are not visible to you. That said, private companies with outside investment can be on good financial ground, but they may have more structured times of the year to ask for increases, have policies that limit changes in pay to be tied with role and/or title changes, and/or have a specific schedule for raises or cost of living increases.
Publicly traded companies are somewhat similarly situated, with the added fact that the financial team, C-suite, board of directors, and public shareholders can put everything they do with their money under an even stricter microscope. The financial statements of publicly traded companies are recorded back to the SEC and subject to more regulations. Employee salaries are usually posted in aggregate under General & Administrative Expenses or itemized as something along the lines of Salary Costs on financial statements. Publicly traded companies that are run well (i.e. free from fraud) have clear compensation structures and pay processes that should be communicated with employees. It is fair game to ask about these processes if it is not documented in the employee handbook. How HR responds will tell you a lot about what is going on behind the scenes if you can read between the lines.
Non-profits vary wildly based on the total dollar amount of donations and/or public funding. The % per dollar donated passing through to the people or entity the non-profit is supporting says a lot about the capacity to handle unscheduled pay increases. Other considerations include whether the non-profit provides services, tangible goods, or even provides direct funding to individuals who need additional financial support. For example, an organization supporting veterans and taking 80 cents from every dollar for its own overhead (e.g. salaries for individuals providing support services such as behavioral therapy or job training) theoretically should have a higher compensation capacity than an organization putting 80 cents from every dollar directly into the hands of veterans through tangible goods (e.g. gas cards, housing, supplemental food, etc.). In the second case, employees of these organizations act more as middlemen, fundraising, collecting, and transferring products over to people who need them; these non-profits therefore have a fiduciary responsibility to limit salaries and maximize the benefit to the population they serve. See how much information you can get about how your non-profit organization utilizes its funding before negotiating for a better outcome for yourself.
Public or government entities notoriously have the strictest compensation structures (often referred to as pay schedules in this area of employment). Information is very public and there are a lot of factors that go into deciding where someone falls on the pay scale when they first start. Highest attained educational degree (whether in a related field or not), number of degrees, and years of work experience have a huge impact on pay. Once someone is placed on the pay schedule with timed increases and defined compensation levels for years of service, it is rare to deviate from the schedule with additional pay increases without extenuating circumstances. These could include obtaining additional education/certifications or being selected for a higher role sooner than expected due to sudden vacancies. There are some exceptions among these entities. Public higher education institutions for instance can receive a mix of revenue from research-related patents, government funding, public or private grants, and student fees. Due to the nature of the different revenue streams, different roles (such as faculty vs. administrative) are funded differently and have different approaches to salary increases. Again, see how much information you can get about the funding situation before starting a negotiation. You often need to apply to a higher position to have a shot at earning a higher salary in these types of organizations.
When Structure and Function Become Dysfunction
Sadly, some organizations do have unorganized compensation processes that produce pay disparities. In the situations that wind up splashed across news articles and in bitter court battles, you can bet that behind the scenes, compensation processes were disorganized. This messy approach to compensation can fall anywhere on the spectrum from intentional to unintentional acts. If it is intentional, your employer might have bigger issues (internal fraud, misleading profit projections to investors, intentional discriminatory practices, etc.) and asking for a pay increase will likely not solve deeper issues you may have with working there.
On the unintentional side of things, the cause can range from an overstretched corporate team and rushed hiring processes, to sheer incompetence. Sometimes companies that grew too quickly simply did not have the infrastructure in place to guarantee that its compensation ranges and processes were internally consistent. This level of disorganization can sometimes happen because of a time pressure to fill certain positions and an inability to find anyone internally skilled for the positions. When managers and recruiters find external talent, some skills might come at a premium price and to fill the positions quickly they may offer pay that exceeds the current internal salary ranges. This creates an instant pay disparity between existing employees and new hires. Pay disparities based on talent availability tends to happen during hiring booms or periods of high turnover in the organization when management struggles to get enough people doing the work that needs to get done to keep operations running. If the company’s leadership team is competent, there will be a clear plan to make adjustments over time to bring the salaries into aligned with equal pay for equal work. If the leadership team struggles to address pay disparities with frequent booms and/or high turnover, it could be worth making a case for a pay increase, but bear in mind this is like putting a bandage over a bleeding tumor – a temporary solution to a deeper disease. If the incompetence is rampant and it seems like the leadership cannot ever get a hold of how to run the business in a stable manner, the longer you stay there, the more your earning potential will be affected over the long run.
Poorly executed mergers & acquisitions (M&As), can also create situations where it takes years to unravel and adjust the compensation disparities between two or more different companies. If you are seeing a pay disparity between yourself and a coworker from a recent acquisition, it might not be enough cause to jump into a salary negotiation right away. Often, this is a direct result of HR not being brought in to be part of the strategic discussions surrounding potential M&As. Once HR does get ahold of the situation, it will often turn into a 3-5 year plan to bring the different compensation structures from the two companies into alignment by holding salaries fixed for employees from the higher-paying company and incrementally raising the salaries of the employees from the lower-paying company. They might also cut the higher paid individuals over time through layoffs or reductions in force (RIFs), if they are losing money paying out those salaries. Timing in salary negotiations can be key; if your employer recently went through a merger or acquisition, it may be worth letting the dust settle for several months or so. However, pay careful attention to whether and how they are addressing the issue.
Other times, pay disparities can occur due to a lack of compensation decision discipline. For example, you may find that managers allow employees to metaphorically take the company hostage by threatening to quit if they do not receive a raise. If 7 out of 13 employees with similar experience and education levels start doing this and realize it works, repeatedly getting those strong-armed raises, imagine the situation 10 years down the road when those salaries stack up against employees who did not use this tactic. If the company additionally did not have disciplined salary brackets for those roles and everyone received a different overall % raise with each instance…well…congratulations, you have walked into a compensation analyst’s worst nightmare. See previous comments about public or private companies that lack the proper internal compensation infrastructure. If this is the situation at your organization, there are deeper management issues you may not be seeing.
Other Legal Considerations
Is your employer based in (or has operations in) a state that demands strict adherence to Equal Pay or Fair Pay Acts, such as CA? Are they obligated under an EEOC investigation to report back their Affirmative Action Program, including reporting the pay of each employee? Is the company headquartered offshore, engaging in hiring foreign nationals, or doing intracompany transfers with foreign nationals and is therefore required to report back individual employee earnings to the government for compliance with USCIS regulations? All of these employment law situations impose restrictions on decisions related to salary increases.
Situational example (a.k.a. what you don’t see happening behind HR’s closed doors):
1) You see a higher salary at a different company and the role description sounds exactly like the work you do right now. You decide to negotiate.
2) Your supervisor consults with HR. HR does a salary review.
3) HR finds that you are already at or near the top end of the pay bracket for your role with them, regardless of what the other company is doing. That is literally their business, not your company’s.
4) Additionally, your employer has 3 other employees who are a different gender than you, who do similar work as you in a different business unit and they have roughly similar experience/educational levels.
5) HR and Finance crunch the numbers on how much it would cost to raise all 4 employees’ salaries to not create a discrimination situation for the other employees. They determine whether this action makes any sense. (Though realistically, they would likely skip to step 6 due to the fact you are already at the top of the range.)
6) It is very likely your request will be denied. What happens next often depends on how your supervisor/HR communicates the news.
7) You now have to decide whether you feel hurt enough about the rejection to jump ship and start applying to another employer or you understand the reality of your employer’s financial/legal situation and get past it to continue your career with them.
Potential Downsides of Negotiating
If an employer is following a strict % raise per year, it might be hurting for cash, tied to investor ROI goals, or tied to legal compliance rules. Essentially to look “okay” without letting rank-and-file employees know about whatever potentially scary thing might be going on with the company, management is likely only paying raises that are the equivalent of cost of living or inflation adjustments (you may have seen the term COLA thrown around). Trying to negotiate for more during rough economic times might paint you as a person out-of-touch with reality. Often, only your executives and some HR positions know what tough business conditions might exist in the company, but they do expect average employees to have some general sense of whether economic conditions are good or bad. Asking for a 25% raise while thousands of people in your company or industry are losing their jobs is pretty tone-deaf. This is especially true if you have only been with an employer for a short amount of time like <2 years. True story, an employee with 1 year and 2 months of experience with a particular employer once asked for a huge raise while her manager was trying to figure out who to lay off due to budget reductions. Earlier in the week, he had just announced to the group that the client contract was ending without renewal in two months. Guess who he sent over at the top of the list?
If you ask for too much, even when business is good, you might still get a bad reputation behind the scenes. Asking for more than a 10% raise without exceptional justification is going to raise eyebrows; 10-15% raises are typically reserved for promotions to a higher role, title, or level of responsibility. If you have previously successfully negotiated up, but you start asking too often, you may also get a bad reputation behind the scenes, especially if your work product does not match up to the money demands you are making. There can sometimes be serious downsides for trying to over-negotiate in companies that have structured cycles for pay increases or promotions.
The Triumvirate of Pay Ranges, Employer Financial Status & Salary Negotiation
Roles are often bracketed by low and high salaries. Salary brackets are set using years of experience, education, professional licenses, certifications, etc. As you stay longer with the same employer, job performance determines whether and how much you move up within that bracket. If you keep pushing for raises or % increments that put you up against the high end of the bracket while staying in the same role, you might be setting yourself up for trouble. If you are not internally recognized as a top performer, but you are at the high end of the pay bracket, you are an easy pick to let go during layoffs to save money. If you are in that situation and in a somewhat rare role, you are an easy target for a reduction in force (RIF), where the company says the role just is not needed anymore and they can show instant savings by getting rid of you.
In Sum
All of this is not intended to scare you away from negotiating if you can find justification for why you deserve a higher salary specifically at your current organization. However, armed with the knowledge of how org structure, legal compliance, and other internal factors impact compensation, you might want to reflect more on why, when, and how you ask for more. Ultimately, to negotiate or not is your decision, but the process can be easier and more positive when you have information from the bigger picture to do it with your eyes wide open.