March 23, 2009

The real reason employers want your salary history: Hiring is a crapshoot

Filed under: For Managers, Hiring, Job Search, Making money, Recruiting

We’ve talked salary history to death. I dunno — it still astonishes me that HR demands it. Not one compelling reason has been offered to justify why HR must have it. On the other hand, we’ve heard from enough job hunters who routinely decline to disclose their salary, and life still goes on. The Job Police don’t show up at anyone’s home with warrants for old pay stubs. Lots more folks are aware that they can say NO. (I’ll offer this caution again: Withholding salary history could cost you an interview or a job. Judge for yourself before you act. Saying NO ain’t for everybody.)

Which brings us to a bigger matter. The real reason employers want your salary history.

Now, I don’t accuse employers of conspiring to defraud job applicants of decent job offers.  (Though, I do think some companies — including the one represented by the HR manager we all heard from — are indeed defrauding applicants.) I think the problem is far bigger. In most cases, I think companies demand salary information because they don’t know how to run their business for profit.

When they’re trying to fill a position — and put a value on a job applicant — I believe employers just plain don’t know how the job contributes to profit. They have no idea how to judge your ability to do the job or how the work will contribute to profit. In other words, they have no idea what you are worth. The job is just a line in a budget, and the number is right around what it was last year.

So for most employers, hiring is a crapshoot. They don’t know how one additional employee hired today will affect profits. Think about that.

When was the last time an employer showed you a business plan for the job in question — with a number in it that shows what you’re expected to bring to the bottom line?

I contend that this is the problem. Employers want your salary history because they need to start somewhere. If they knew how the job in question contributed to profit, and if they could figure out how you will contribute to that profit, well, then the entire hiring process changes. We want only people who will boost our profits significantly. In fact, we’ll pay based on how much extra profit we think you will bring to the bottom line. So here’s the business plan, here’s what this job brings to our bottom line. Show us what you think you can do — that’s what we really care about. That’s what we base offers on.

I contend that the only way a company can rationally determine a job offer is to first put together a business plan for every position the company fills. Then it must measure an applicant against that plan. Otherwise, hiring is a crapshoot. In fact, hiring is a crapshoot and employers want your salary history because they don’t know the value of the job in question. They have no idea how much profit it can produce. So they’re flat on their asses, using what your last employer paid you, to predict their own future.

That’s a woo-hoo! big problem.

20 Comments on “The real reason employers want your salary history: Hiring is a crapshoot”
By Bill Karwin
March 23, 2009 at 5:22 pm

Yes, you have been covering the asking-for-salary-history topic a lot lately. I think you’ve made the point quite well.

I don’t think employers are going to be able to do what you suggest, articulate the job in terms of contribution to the bottom line. It’s too hard to make that prediction with any accuracy.

Anyway, that has nothing to do with market wages. That’s a function of supply and demand.

For example, if a company decided they could sell more widgets if they set the price at $1 instead of $100, obviously that affects their revenue. But they can’t use that argument to pay the widget developers pennies on the dollar. Development costs just as much as it did before.

By Nick Corcodilos
March 23, 2009 at 6:12 pm

Bill,

I like your point about $1 widgets. But that just puts a sharper point on the question about profit and triggers more questions that employees and employers don’t normally talk about (together).

Who is responsible for profit? Is it reasonable for a company to drop the price to $1 in order to “compete” in the market — if that means the company must hire cheaper labor to make the widgets? What happens then?

Let’s look at a better example. Airlines lower fares to be gain market share. They hire cheaper pilots and mechanics. More planes crash, customers die.

There’s that pesky profit question again. Are we making profit, or are we being silly-asses? Who is responsible for profit? (I’d venture that nowadays, almost no one is. Marketing departments are running companies. It’s all about advertising. The product has become irrelevant.)

I think what you’re pointing to is idiotic corporate decisions intended to deal with market share. How does a company sell that to the top-flight engineer who interviews for a job? And what happens when the company discloses the business plan — and the engineer sees that there’s little profit in his work, thus little money for him in the near future?

Suppose an engineer walks in and says, “You’ve got a $100,000 job here that you’re trying to fill. That is based on shipping 1 million $100 widgets a year. Suppose I could show you how to tweak the widget so it could be two widgets that address two separate markets. Now you have the chance to ship a million at a $100 apiece, plus half a million more to the second market for $50 apiece. Same cost for any widget, except what you’d pay me to design the new one. I want $150,000, with $50k payable when production starts. It’s up to you.”

What’s the “market wage” for that engineer?

By scottthekyhrguy
March 24, 2009 at 12:13 am

so is the libel (or is slander on the internetm aimed at mer or you email correspondent?

i have a propsition for you; identify a potntial candidate for a real job; ask if he or she is willing to take part in an experiment, ensure that he or she is not aware whether you or i am the reccruiter pursuing him or her, see who comes back the bedt and who imparts the most useful data from the candidate. have a third paerty grade our candidat evaluations and see who gets more info. i know a lot more about headhunting than you appear to know about hr. might want try taking one of the SHRM practic tests; oh, and study up on slander and libel as it applies to web 2.0. i suspect your reference is gonna be safe, but your never truly anonymous; just as Peter. hopefully the guy is not litigious,

By scottthekyhrguy
March 24, 2009 at 8:00 am

sorry. posting via blackberry and i stink as a thmb typst; cn i edit?

By John Zabrenski
March 24, 2009 at 8:12 am

Nick,

With regard to the value of a position, you can turn around the question and ask “what is the financial risk of not doing this work”?. The answer for my technology is that you go out of business in 5-10 years because constant improvement is required in the products.

I work in R&D for a large chemical company that sells into many markets. The higher margin markets are demanding and technically sophisitcated. It is more than a little difficult to predict income streams from this type of work. There might be six teams working to either develop a new product or defend an existing one from attack. Two teams might be very successful, and the other four are marginal. Next time around, it’s two different teams that hit it big. Over time, the process has morphed into a shared gain system.
Since you can’t put a good number on the value of the work in the short term, companies tend to devote some percent of their sales towards development. Furthermore, the value of an individual is largely determined by market forces balanced by the need to keep personnel churn down to acceptable levels (about 5%).
Also the salary ranges for a given skill level are fairly wide, say 30%. This is where the wiggle room comes into play.
To summarize, your particular skills, education and experience place you in a bracket that is not negioable in that organization, but within that bracket there is room to bargin. Once you top out in that bracket, you either have to get promoted, leave or just suck it up.
One alternative is to work for a smaller, rapidly growing organization that has an immediate need for you skills along with a higher potential for advancement, but much higher risk of failure.

By John Rosberg
March 24, 2009 at 10:04 am

Nick — I think you’re right on target with your analysis.

I’ll go a bit further — most HR folks are not tied into their companies business nearly enough. They seem to operate with some series of opinions and mindsets about how they should be conducting their part of the business with little or no regard as to the cost, benefits, or other impacts their operations may have on their empoloyer’s operations.

While I had a sneaking suspicion that this was true, it wasn’t until I worked with a world-class HR person who WAS engaged in teh business, consulted with his internal clients, and helped shape policies that were aimed at increasing our effectiveness and efficiency.

Quite an eye-opener.

By Nick Corcodilos
March 24, 2009 at 11:08 am

Scott: I think it’s time you stopped reading everything on these salary threads as though it’s directed at you personally.

John Z: This is the kind of dialogue I’m looking for. R&D is a strong argument against what I’m suggesting. Thanks for sharing one level of analysis on the profit question. Now how do we start to apply this to the next candidate – in R&D? How can profitability be factored into, and some aspect of it “assigned” to, every job?

John R: Bingo. I’ve met very few HR managers who take the calculation out of HR and into the business unit. The best HR people I know LIVE in the business units they support, but that’s very, very rare. It’s why I argue that HR should not be permitted to handle recruiting. That function belongs at the departmental level, to be managed by the person who runs a department. Not skilled in doing that? Then get out of the job, or learn how to do it. I think 30% of a manager’s time should be devoted to recruiting. Of course, that requires a corporate shift. The justification a CEO will offer: “People are our most important asset!” Yah, well, PROVE it, Dopey! Thanks for spiking the discussion!

By Bob
March 24, 2009 at 11:22 am

There are several assumptions about when or what to reveal about salary I find amusing.
1. The assumption that salaries for a job are confidential. If you look at it, only white-collar, private-industry professionals and the corporations have this assumption. Most blue-collar or McDonald’s workers or union or government employees and employers know the salary scale for each job grade.

2. The candidate withholding their salary based on the hope that they’ll win the salary lottery and actually get more then they were paid or even dreamed of. This did happen to me. ONCE. It also made me a major candidate to get laid off a couple of years later. Most of the time, I have no idea, once I get the job, if I’ve won the salary lottery or not.

3. The employer should withhold the salary range.

Instead of having these assumptions, I’d like to recommend that corporations publish a very tight salary range for every job (at most $10,000 difference between the high and low). I’d also like to suggest that the hiring manager can give hints as to what will be considered the skills that will get the candidate the higher end of the range.

What would happen if all employers published a very fixed and limited salary range with the job description? I think that candidates who apply for this job would be self-selected to be interested in this position. They know what skills they can provide and they know what the pay would be. They’d self-select.

Also, I believe it would be easier for managers to stick to that year’s salary budget because they know what the job is going to pay before they hire the candidate.

By Edward
March 24, 2009 at 12:12 pm

Exactly, know the profit impact of a new hire. As a manager, a new hire is no different in terms of profit impact than launching a new product or service. You should go through the same rigor of analysis as you would a new product launch. After all, productivity is a key measure of a departments performance in many companies, so understanding what kind of skills and knowledge is needed to impact productivity in a positive way, is key. This way you really know why you are hiring someone and this gives you the best possible position to go into an interview. With all that information at hand about what you need and your company needs, you can really get to the heart of the conversation with a candidate.

When I hire for a sale person, I know the quota for their territory, the past performance, expected performance, etc… So it is pretty easy to come up with a budget I can afford to pay someone and I know what kind of skills I need for that role because I have done my homework of analyzing what has made good and bad sales in the past based on the client demographics. Most of this data is available to those in sales and marketing, at least in a well run organization. I know many established companies that don’t have such information, but you probably want to avoid those companies in general.

I will say that in my field of sales and marketing, a lot of old school or maybe just lazy managers, don’t want to bring in the financial rigor that is being demanded of us. This only hurts their position. Sales and marketing, especially the marketing side, has had to become more quantifiable over the past decade. I find this a real positive. But I still find when I informational interview, a lot of managers in the field who don’t want to be measured. So I wouldn’t expect their HR department to be any different when it comes to hiring for positions in those areas. If HR is using old tactics like asking for salary history, try and sit down with the hiring manager and see what their style is, if they are using out of date methods as well, you need to question if that’s really a fit for you.

By j
March 24, 2009 at 12:23 pm

Bob, when I got hired, my company strongly emphasized the fact that its confidentiality agreement includes salaries—which legally bars me from revealing my salary to potential future employers. And revealing my salary to anyone within the company would get me immediately fired.

So, salary confidentiality isn’t always just an assumption.

By Bob
March 24, 2009 at 12:25 pm

OK, BJ, I’ll bite.
What is the legal basis for having a clause around salary in a confidentiality contract or even in a non-compete? I don’t expect you’ll know the answer to this. Perhaps a lawyer could help out here.

In the meantime, I support your position. You needed to keep it quiet.

By j
March 24, 2009 at 1:26 pm

The clause that includes salary in our confidentiality agreement helps minimize exposure of our (independent) company information to our (publically owned) competitors when they occasionally try to poach our people. Because we charge our clients based on a percentage of profit above our cost structure, rather than the (much pricier) fee-based invoicing of our (less profitable) rivals, keeping our cost structure undisclosed provides a significant competitive advantage.

(I don’t know the legal technicalities involved in enforcing the clause; if a lawyer wants to chime in on that, I’d welcome the perspective.)

By j
March 24, 2009 at 1:32 pm

P.S.—In fact, I suspect that if more agencies in my profession insisted that their people keep their salaries confidential from future employers, then the entire industry could get away with paying much lower salaries across the board.

By Nick Corcodilos
March 24, 2009 at 2:17 pm

RE: Salary NDA’s

I’m not a lawyer (so here I go getting into trouble), but I imagine the business logic is simple. Compensation is kept confidential because it’s a competitive advantage. A company believes that what it pays (high or low) gives it an edge that it does not want to compromise.

Ironic, isn’t it — because the same company probably asks applicants for their salary history.

By Karsten
March 25, 2009 at 8:30 am

J,

I see the logic for your company, but not allowing employees to talk money even to each other seems extreme.

I would suspect such a rule to also be a part of a union busting scheme, a split-and-rule tactic: How can people join together behind complaints if they are not allowed to talk enough to identify the problem?

By j
March 25, 2009 at 2:03 pm

Possibly—although I don’t think my industry (advertising) has ever had unions.

By Two takes on cluelessness. -- Hoover’s Business Insight Zone
April 3, 2009 at 6:46 pm

[…] 2. Corporate recruiter Nick Corcodilos thinks that “[hiring] companies demand salary information because they don’t know how to run their business for profit”: The real reason employers want your salary history: Hiring is a crapshoot […]

By scottthekyhrguy
April 4, 2009 at 8:11 pm

Karsten — you’re dead on target. The NLRB has consistently found that prohibition of salary and benfits discussions constitute union busting. A big no-no and a sign of an HR department that doesn’t understand the liability for writing bad policies.

Tacky to talk about money with your peers? Maybe. But it is more or less your right to be tacky.

By donallover
August 10, 2011 at 12:55 pm

1. Can an applicant claim that his former employer made them agree not to reveal salary information due to competition?

2. Further, would that same individual be able to claim it even if its not in the same industry, in other words the new company isn’t really a competitor?

3. What is the reaction by most HR when I complete an online form for salary and state $0?

4. Further still, would someone please tell me the legit justification for why its any of their business what I made four jobs and 10 years ago? My life, my circumstances were very different. I may need more or less or the same. Why is it their business anyway?

By donallover
August 10, 2011 at 12:57 pm

I said above, “Why is it their business anyway?”

I would add, I don’t tell my brother or brother in law how much I made last year; only the IRS.

How could an employer possibly feel it was their bidniz?

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