Getting Lowballed in a Bad Economy
Posted on Wednesday, September 2, 2009 by Frank RocheWould you lowball a person in this economy?
What I’m talking about is taking advantage of a potential employee’s situation. Say he used to make $150,000 per year, and you have a job opening. Since you instituted broad bands, you have latitude. Lots of latitude. In fact, the job could pay anywhere from $50,000 to $200,000 depending on skills and what you want to pay. Since the economy is in the tank, would you pay him $50,000?
I know one part of the argument: It’s a free market. (Okay, if that’s the case, and it’s okay to pay $50,000 for our hypothetical guy, why not take a major chunk of pay away from all your employees? I mean, it’s not like they can just go out and get another job.)
I know another side of the argument: No way. You can’t take advantage of people. (Okay, if that’s the case, why don’t we increase everyone’s pay? I mean, profit is overrated, right?)
What do you think? What would you do?
John H.
Sep 2nd, 2009
Yes, you should lowball people in this economy and use the Philadelphia Eagles as an example of how to do it.
The Philadelphia Eagles operate under a salary cup that is not all that different from a salary budget. Their compensation philosphy seems to be to invest in superstars for a few key roles and pay above market to get and keep those superstars.
For the remaining roles they simply identify replacement level talent and pay market rates. Should market rates represent lowballing then so be it.
Steve Boese
Sep 2nd, 2009
I think if you want to bet that the economy in general, and the market for the specific skills this new hire possesses will remain depressed for the duration of said person’s expected tenure with your organization, then go ahead and try to low-ball. You are not obligated to offer ‘war for talent’ type compensation in a down market. The candidate is also not obligated to accept either. I’ve seen so much written lately that if and when the economy and job market improves that voluntary turnover is going to shoot upward. I am not sure if that is true or not, but if you do believe it then you should expect the ‘bargain’ new hire to look to bolt and their first opportunity. It is a great question for sure.
tlcolson
Sep 2nd, 2009
Lowball? No.
Pay what you need to pay to get and KEEP the employee.
Otherwise, that person will be part of the mass exodus once hiring starts again. And the point of all that hard work for your hire would be what, then?
I don’t think huge sign-on packages are going to return as the norm any time soon, after all, those perks were designed and implemented when we had a talent shortage.
But I always remember the adage…
you get what you pay for.
Pay isn’t everything, but if you aren’t in a budget crunch, intentionally standing firm on an obviously low offer is doing your company a disservice, and will create an unsatisfied employee.
Chris Ferdinandi – Renegade HR
Sep 2nd, 2009
Frank, I think tlcolson nailed it with their response. You don’t have to high-ball and pay massive amounts of salary, but you shouldn’t low-ball, either. Pay people fairly, create a culture that inspires people to do kick-ass work, and you’ll have a pretty awesome workforce.
Eva
Sep 2nd, 2009
I like Steve’s ambivalent response.
It depends on what your business needs (considering both present and future needs). It comes down to, What is that person worth to YOU?
While he/she was worth $150,000 to some other company, perhaps they aren’t worth $50,000 to yours.
Puneet Vaghela
Sep 3rd, 2009
A happy workforce is a productive workforce. There is obviously a limit to how happy a boss can make their workforce before the workers start assuming they have it easy, but low-balling is a definite no go area. $50,000 will be too low to pay the hypothetical person, and $200,000 will be too high in the current economic climate. The person will know the situation, but taking a $100,000 drop is enough to depress anyone. Therefore, find the middle ground and agree upon that. The boss is happy because they’re only paying $100,000 for a $150,000 employee, and the employee is happy because they are still earning a 6 figure salary despite the climate.
It would still be regarded as low-balling, but you have to take into account the climate relative to the situation.
Bill Strahan
Sep 3rd, 2009
I think that it is a risk management question. What bundle of risk to you tolerate and what bundle to mitigate through your choice? Some of the other comments mention some of the risks of low-balling. It seems unlikely that you would retain the person if you truly were paying one-third of their market rate. However, I think that the bigger risk is during the period that you retain the person. If someone is taking the job out of some desperation, they may do what they need to get in and stay aboard – of course while they continue their search. The bigger risk is that you have a barely engaged employee on the team now. The soft cost of their disengagement and dare I suggest resentment is much greater than the risk that they would leave.
No employee should be hired unless their economic contribution to the firm exceeds their compensation package – business 101. By having a less than effective employee in house, it is that greater economic value that you are destroying – possibly by polluting the atmosphere for the other people who work there as well.
The risk on the other hand is that this person is not worth $150K. Maybe the last employer was foolish in their compensation or in their hiring of Mr. Available. Value is contextual and it is dynamic as Eva said above. The risk of over paying is that you get your own economics out of balance or the internal equity of your shop out of balance.
What is the answer? Perhaps a 4-stage approach which creates incentives and shared responsibiltiy for both sides. 1. Offer $100K in base salary; provide a “signing bonus” of $15K at 1 month and 6 months. Provide an annual bonus of $20K for year end (in addition to any other bonus). First year earning opportunity is now $150K but to earn that full amount there had to be sufficient contribution to stay employed and to meet some strong performance goals for the bonus. You then have the ability to let the signing bonus drop off if the person is satisfactory as an employee but not worth the full $150K, or you can provide merit/incentive increases to maintain that level of compensation. The employee knows that this is a trial and that he/she must perform to get their full package. However, the first two slugs are stay pay and not performance pay per se. This allows them ramp up time. They have to aclimate and create a good first impression to get that piece. Then over an annual cycle they can true up to where they were with full performance and by providing a return on the investment of the owner in their compensation.
Frank Roche
Sep 3rd, 2009
@Bill Wow…thank you for that great analysis and approach. That would be a great post on HumanMarkets. I am reading and rereading this. Wow.
Frank Roche
Sep 3rd, 2009
@John Intriguing…I guess if it’s a 5-year deal like most NFL contracts, it’s a good approach. Very interesting approach.
David Porter
Sep 3rd, 2009
Frank – Great post and wonderful question. The key to me is the value that person brings to your organization, not necessarily the dollars paid. Any artificial skewing (up or down) of the compensation is detrimental to the company and, ultimately, detrimental to the employee relationship.
I believe the hard choice is how to provide fair compensation with enough flexibility to reward the person who delivers great value. I tend to gravitate toward compensation + incentive structure. It give the employee the foundation for their work and the financial incentive to strive. That builds both the business and the employee relationship.
Sarah Chambers
Sep 4th, 2009
@Bill – that’s some compensation consulting people should pay for!
This whole discussion makes me wonder some related things…
1) Companies have comp philosophies… often about targeting pay at (or above or below) the market. What is the market? Is it “what someone will pay for it” – a classic definition. Is it “what the comp studies say it is?
2) Do folks think market median pay levels will ratchet down now (as they have gone up in the past)? If so, is hiring below market the natural course of things?
3) Will companies rethink pay philosophies in light of the changing market?
4) What does someone’s previous pay level indicate? Are companies more likely to use some factor of previous pay as a ceiling than as a floor?
5) What role does internal equity play in a market system (particularly when it’s not defined in a comp strategy)? Should it be used to balance pay internally in some way? How do you deal with pay compression and pay inversion when it’s a buyers market for talent?
6) What are the legal implications of a declining wage market(in light of Lilly Ledbetter, Pay Transparency)?
So many complications. Good communication comes from making things personal. Any one personal story can be a very persuasive argument in either direction. Pay is personal. And, I agree with lots of what’s said above – individuals have different values to different companies. And, legislation requires companies to be “fair” in some ways. Again, so many complications.
Frank Roche
Sep 4th, 2009
@David Porter: Thanks, David. My sense is lowballing, as you said, is detrimental to the company. To me, it’s worse to have a disgruntled employee than an empty position.
Chris Ferdinandi – Renegade HR
Sep 4th, 2009
@Sarah Chambers – Great list of questions! One thing I’d like to add: Just as individuals individuals have different values to different companies, individuals also value compensation differently.
Don’t get me wrong – I don’t know many people who would work if they weren’t getting paid. But some people want to maximize pay regardless of how crappy they find the work. Others would gladly take less pay for work they find more fulfilling and engaging.
Every combination of person, role and organization is different.
Sarah Chambers
Sep 5th, 2009
@Chris Good point. Frank had a great post about this topic recently http://www.knowhr.com/blog/2009/08/25/everything-you-think-about-pay-for-performance-could-be-wrong/. I don’t think it’s all about pay. But… pay is personal. People care about it. And, they use it to keep score and as a measure of how they are valued even if it’s not their primary motivator.
John H.
Sep 8th, 2009
@Sarah – I love the comment about people use pay to keep score. That’s a different angle I hadn’t considered.
The six figure job in Frank’s original post probably requires a unique skill set that don’t fit the profile of replacement level I mentioned earlier and wouldn’t be a candidate for a purely market offer.
But, isn’t it possible for an HR pro to structure a role in a way where pure market pay and high turnover (voluntary or involuntary) could be ok and result in high returns on your compensation investment? Perhaps you find more non-traditional candidates just looking to get their foot in the door in a company, an industry or a different field? Recruit, evaluate, and promote these people appropriately and an HR pro might be the star for finding the next mail room clerk to CEO story.