Pocketmint

small change toward a rich life
27
August
2012

Salary negotiation: we’ve been doing it wrong

For as long as I can remember, the standard advice to job applicants has been ‘never be the first one to name a number’ when it comes to negotiating compensation.

Penelope Trunk, founder of Brazen Careerist, says so in no uncertain terms:

… when it comes to discussing your potential salary, never give the number first.

The right answer to the question, “What’s your salary range?” is almost always some version of “I’m not telling you.” The person who gives the first number sets the starting point. But if that’s you, you lose. If you request a salary higher than the range for the job, the interviewer will tell you you’re high, and you’ve just lost money. If you request a salary lower than the range, the interviewer will say nothing, and you’ve just lost money.

So you can only hurt yourself by giving the first number.

Similarly, Ramit Sethi of I Will Teach You To Be Rich has a 15-minute video in which he and a friend roleplay different ways for job applicants to avoid naming a salary number first, even under repeated direct pressure. Watch it if you’re curious — though I warn you, for anyone who’s socially sensitive it’s slow torture.

If that scenario makes you cringe, I have some good news: it’s the wrong strategy.

•   •   •

A few weeks ago I was reading through an online forum, and I saw someone’s post about a job interview she’d just landed. The discussion had turned to a question of when and how to negotiate a salary.

Always eager to help, I started to type out what I knew, including: “She who gives the first number loses.”

woman's fingers on a keyboardAnd then I stopped cold. As in, my fingers literally froze on the keyboard, while I experienced severe cognitive dissonance.

I’ve been on a mission for a couple of years now to learn everything there is to know about behavioral economics. I’ve spent thousands of hours studying the inherent cognitive biases to which all humans are subject.

One of those biases is called “anchoring.” The central premise of anchoring as it relates to negotiation could be stated as: “She who gives the first number wins.”

Why, I suddenly wondered, is the standard advice for salary negotiation exactly opposite from everything we know about human psychology?

•   •   •

I’ve mentioned anchoring before, but without any explanation beyond a link to the Wikipedia page, so let me take a moment here to sketch it out for you.

Anchoring is the human tendency to be influenced in decision making by outside information, regardless of relevance.

It works for lots of things, but numbers are particularly easy to measure and understand. Imagine that you are asked to write down the last two digits of your Social Security number. And then you are shown an object — a box of chocolates, for example — and you’re asked how much you would pay for it.

chocolates in a boxThe lower the last two digits of your SSN, the less you’ll be willing to pay. If you have a high number (like me with 94), you’re going to end up paying more.

This is true despite the fact that the Social Security number has zero relationship to the worth of a box of chocolates. This is true (and this is the part I hate) even if you’re aware of the concept of anchoring and try to compensate for it. Our brains can’t help but use that random number as a reference point.

This has been tested up, down, and sideways in dozens upon dozens of studies going all the way back to the 1970s. Marketers everywhere are aware of it; it’s the reason for MSRP on the new car sticker and the ‘regular’ price above the sale price on the grocery shelf and the idea that two months’ salary is the proper amount to spend on an engagement ring — an idea that originated with an ad campaign by diamond conglomerate De Beers.

•   •   •

Anchoring comes into play in negotiations as well as purchase decisions: studies consistently find that making the first offer works in your favor.

I couldn’t imagine any reason why salary negotiation would be exempt from this universal reality. But I wondered, had anyone tested anchoring with regard to salaries specifically?

Happily, the answer turned out to be ‘yes’: one Dr. Todd Thorsteinson, University of Idaho psychology professor, published a paper just last year on anchoring effects in initial salary offers.

In his study, university students were put in the role of employer and asked to make a salary offer for a qualified candidate.

All participants were told that the applicant’s salary at her last job was $29,000. (The researcher made the hypothetical candidate female because prior research has shown that ‘initiating salary negotiations [is] particularly harmful to female applicants’. That’s from a 2007 paper, so yeah, women still getting the short end of all the sticks. Awesome.)

businesswoman and businessman laughingSome of the interviewers were also told that the candidate, when asked what salary she wanted, replied, “Well, I’d like $100,000, but really I am just looking for something that is fair.”

The control group participants made an average salary offer of $32,463. The ones who additionally heard the candidate mention $100K offered, on average, $35,523.

That’s over $3000 — a 9% higher salary — just from making the right sort of joke.

It didn’t matter whether the joke number came before or after the interviewer’s knowledge of the $29K former salary. It also didn’t make a statistically significant difference how crazy-huge the joke number was — if anything, the crazier the better. When Thorsteinson repeated the study and used ‘a million dollars’ instead of $100K, the average salary offer was $36,184.

Now, mind you, this study was done with college students, not with seasoned hiring managers, and Thorsteinson acknowledges that the effects “are likely larger than what would be found with employers with considerable experience negotiating salaries with job candidates”.

But it’s clear enough that salary negotiations are not exempt from the effects of anchoring. And that means that the common advice to job applicants to avoid naming the first number is wrong.

•   •   •

So what should you do in a salary negotiation?

Don’t be afraid to name a number — just make sure it’s high. There are two basic ways to go about this:

One tactic is to know in advance the relevant salary range — you can research salaries on Glassdoor — and confidently name a number near the top. In this scenario, you’ll need to be prepared to justify your worth to the company, and to walk the fine line between self-confidence and arrogance. You should also indicate a clear willingness to negotiate (see the comments below for examples).

The other strategy is the joking method used in the above study — name an obviously outrageous number, then laugh it off. This is a good tactic for anyone who’s uncomfortable with the level of immodesty required to defend the premise that you’re worth top dollar. It also might be the better path for women who are being interviewed by men, as the other study referenced above shows that men often penalize women for negotiating.

Here’s the thing: even if you have admitted to a low past salary, or if you bow to pressure and follow the joking comment with a merely average amount, you will still benefit from having mentioned the larger number. Science is clear on that point.

There’s one thing I do think Ramit was right about: that rehearsing the negotiation is the best way to prepare. Ask your spouse or a close friend to play the role of interviewer and practice tossing off your best high-salary jokes. Here are a few I cooked up to get you started.

What sort of salary are you looking for?
“Well, I’m looking for a million dollars, but I suppose I could be convinced to take a little less than that if the job were really awesome.”

What is the minimum salary you would accept?
Shetland pony“One point five million and not a penny less.”

What are your salary requirements?
“Three hundred thousand dollars, full family health premiums, and a 10% 401(k) match. And a pony.”

Okay, the last one might be a little corny, but it gets the job done. Got a cleverer suggestion? Leave it for us in a comment!

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15 responses

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  1. Amanda says

    This is very timely for me, thanks. I wish someone would replicate this with actual hiring managers who are working with a specific ceiling.

    The trickier issue for me is when they want you to name a salary or a range before you have been offered the job (sometimes with the job application), in which case I’m not sure anchoring would apply. I think if you aim too far above what they are prepared to pay, you might cut yourself out of the pool.

    • Karawynn says

      Amanda, I would still wait to name a number until after the interview if possible (although sometimes with recruiters that’s not an option).

      The fear of being cut out for naming a number too high is exactly why people have said ‘don’t name a number’ for so long. But — so long as you get two things right — it shouldn’t be a concern. One is knowing the market, which is why salary research is important. And the other is showing a willingness to negotiate even while naming the high anchor.

      So for example, say your research shows that the market rate for a particular job is $45-60K. When asked, you say, “I’m looking for $60K. But benefits like insurance and vacation are important to me also, so with the right package I’d consider something a little lower.” That way you’ve anchored with a high number but shown that you’re flexible. That’s not going to scare anyone off if they were already interested in you.

      Of course, the nice thing about the joke strategy is that it sidesteps the whole issue, if you’re uncomfortable naming a realistically high number.

  2. Jeff Koke says

    Neat analysis. I wonder if it would work to mention the outrageously high cost of a hypothetical car you saw in the parking lot on the way in — “Did you see that Bentey out there? I bet that cost a couple of hundred grand.”

    Also, the last two digits of my social are 99 — no wonder I’m always paying $600 for boxes of chocolates. :)

    • Karawynn says

      Jeff, I suspect that would only have an effect if you were somehow able to work it directly into the actual conversation about salary, as opposed to mentioning the irrelevant number much earlier in the conversation.

      Re boxes of chocolates: :D

  3. Daniel Dvorkin says

    ‎”Why, I suddenly wondered, is the standard advice for salary negotiation exactly opposite from everything we know about human psychology?”

    Probably because the type of people who sell videos with titles like “I Will Teach You To Be Rich” are not actually on the side of the type of people who are trying to negotiate a fair wage for honest work.

    • Karawynn says

      Maybe, Daniel, although I would tend to give Ramit the benefit of the doubt that he is actually trying to be helpful. I think that in this case he (and practically everyone else who’s ever given salary negotiation advice) just aren’t caught up with current psychological research.

      • Daniel Dvorkin says

        Fair enough. I admit I’m reflexively suspicious of people who make money by telling other people how to make money; there’s a whiff of the pyramid scheme about it. This may be too cynical of me.

        • Karawynn says

          That’s perfectly understandable, and I know exactly what you mean — sometimes the field can be predatory.

  4. Tracey S. Rosenberg says

    My husband, who had zero interest in weddings, nevertheless had internalised the “two months’ salary” crap and was genuinely worried that he wouldn’t be able to afford my engagement ring. After we discussed how there is no way in hell I would wear anything that expensive on my finger, I explained that this was propaganda created by the diamond industry.

    My engagement ring and our wedding rings (all silver) cost, all told, under $150, and we’re perfectly happy with them. Win!

    • Karawynn says

      Awesome that you knew the source of the ‘two months’ rule! And yeah, I’m with you — can’t imagine wearing anything that expensive on my person. (Plus I don’t actually care for diamonds — I like colored stones. Cheap ones, even, like garnets and ambers.)

      It’s kind of sweet that he was worried, but I’m glad you set him straight. :)

  5. Wolfe says

    Great article, Karawynn. I’m familiar with anchoring but I never put it together with salary negotiations. Well done.

    One related horror story I will share; I once interviewed for a tech company and was clearly the #1 candidate for the job. They asked how much I was looking for and I named a fairly high number, figuring we would likely begin bargaining later. They nodded, said they’d call, but didn’t. I called them back two weeks later and asked what the status was. They were surprised to hear from me; they said my stated salary was too much, so they hired someone else. Just like people are afraid of.

    I think the takeaway message here is that if you do name a large sum, be sure to show that you’re open to negotiation, like you did in your examples. State a high number for the salary range, and say that you can be willing to go lower depending on benefits, vacations, free coffee, an awesome boss, etc.

    By the way, the tech company folded 1.5 years later. I figure it’s because they didn’t hire the right IT manager. So, there’s a moral for them too.

    • Karawynn says

      Wow, that is a cautionary tale. I agree with you completely about the need to show willingness to negotiate. I made the same point in answer to Amanda, above, but I think I will add a note to the article, since people don’t always read the comments.

  6. Aaron says

    Great article!

    Another possible line for anchoring to a higher salary, “Let’s see… the President makes $400,000. I’d settle for that.”

    Or perhaps something like, “Before we talk salary, there’s the issue of my usual million dollar signing bonus…”

    • Karawynn says

      I love those! Especially the second one. Great idea!

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