In this series of posts, we are examining the impact of salary negotiations on the formation and evolution of the psychological contract. In the first post (see Part 1: dramatis personae) in the series, we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some of the basic principles in the domain. In this post, we will turn the spotlight on the interaction between the employer and the employee before the employee joins the company and examine its impact on psychological contract.
Very few people will disagree with the principle of “a fair day's wage for a fair day's work”. But what exactly would be the fair salary for a particular job in a particular company at a particular time (or even what will constitute a fair day’s work in the same) is far from simple. This is especially true in the case of those jobs where the employee can influence the results (and even shape the job) to a large degree based on his/her capabilities making the ‘fair salary’ dependent on the individual.
There are different ways in which fairness can be interpreted by the employer and the employee. For example, when a company is hiring a person should the salary be decided mainly based on the previous salary the person? That is, if the company gives a ‘good’ (as agreed by the employer and the employee) increase over the previous salary of the new employee, does that indicate a fair deal? What if the salary offered to the employee is lower than that is being paid to other employees in the company (at the same capability level) doing the same job or similar jobs? Can the new employee consider this as an unfair deal? What if the salary offered to the employee is higher than that is being paid to other employees in the company (at the same capability level) doing the same job or similar jobs? Can the existing employees consider that this deal be unfair to them? Should the 'fairness' be decided purely based on the market forces of supply and demand - based on the current market value of the skillset of the employee?
The two basic ways of arriving at the salary for the new employee (entirely based on the employee’s previous salary or entirely based on internal equity) are extreme cases. Most companies will do some sort of a balancing act with different companies reaching different ‘equilibrium points’. For example, most of the companies try to arrive at the new salary based mainly on the previous salary while ensuring that the new salary is within the broad pay range or compensation band for the job (which is market benchmarked). However, these compensation bands are usually quite broad and there is significant room for ‘discretion’. Again, it is usually difficult to compare the capability level of the candidate with that of the existing employees and hence both the company and the candidate can make widely differing estimates regarding the relative capability level of the candidate.
Also, there is a basic conflict of interest involved in salary negotiations in most situations – the company wants to pay as a low a salary as possible (while ensuring that the candidate accepts the offer) and the candidate wants to earn as a high a salary as he/she can (while ensuring that he/she gets the job offer).
It is this basic conflict of interest coupled with the different ways of interpreting what constitutes the fair salary for the particular employee that make the interactions between the employer and the employee highly potent from the point of view of the formation of the psychological contract.
During the selection process, the employer and the employee will highlight what each can offer in the prospective employment relationship. This essentially a selling process for both sides and there is always the temptation to oversell and to get a closure as quickly as possible. However, this is key ‘moment of truth’ (a critical or decisive time on which much depends) in the employment relationship and any statements made during this process (even if it was just a passing mention) is likely to be interpreted by the other party as a promise and give raise to expectations (that form part of the psychological contract). This is especially true for informal and generic statements that don’t find their way into the formal employment contract. For example, if the employer (or any of the agents involved in the selection process like the hiring manager or the HR manager) makes statements like “No one has left us for salary reasons”, “In our company there are many people who received multiple salary increases in a year etc. it is highly likely to give raise to (unrealistic) expectations later! Thus one has to be very careful in making these statements as they are likely to impact the formation of the psychological contract.
However, there is one important advantage at this stage. Since there is no previous history of interactions between the employer and the candidate, there is no existing psychological contract at this stage. Hence while the parties have to be mindful of the impact of the interactions on the formation of the psychological contract, they don’t have to worry about the possibility of the interactions violating the existing psychological contract. Hence both parties can negotiate as hard as they need to do at this stage (a luxury they won’t have later). They just need to ensure that they don’t say anything that is factually incorrect or misleading.
So what do all these mean? We have seen that there are different ways of interpreting what constitutes the fair salary for the particular employee. I would strongly recommend that the employer explains the process they are using for arriving at the salary in addition to explaining the salary components in detail. Also, if the salary fitment that is being offered has implications for salary progression later (e.g. if the salary offered will put the candidate at the top end of the band which would make the future salary increments lower or if the next increment of the candidate can be prorated as the candidate is joining in the middle of the year) it should be clearly explained. This will enable the candidate to make an informed decision and not to feel like a victim later. Yes, there is a possibility that candidate might not agree with the process and refuses to take up the offer. But this is a much better scenario for both the parties as compared to the scenario in which the candidate joins, feels cheated and leaves the company (or functions at a low level of effectiveness). Also, broad/vague statements that can get misinterpreted should be avoided.
The candidate should also specifically ask for the process for arriving at the salary and seek clarifications on vague/imprecise statements made by the employer. Candidates should also negotiate as hard as they can at this stage, because trying to renegotiate the salary after one joins the company is a much more complicated process and it could be interpreted as lack of commitment (or 'attitude problem')on the part of the employee and a violation of the psychological contract.
In the next post in the series, we will take a closer look at the salary negotiations that take place during the tenure of the employee in the organization and examine its impact on psychological contract (and how the psychological contract influences those negotiations).
Please let me know if you have any comments/suggestions at this stage!