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 in the series (see Part 1: dramatis personae) , we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second, third and fourth posts we examined the salary negotiations between the employee and the employer before joining (see Part 2), after joining (see Part 3) and after submitting the resignation (see Part 4) and examined how these negotiations/interactions influence and are influenced by the psychological contract.
In this post, we will examine a special phenomenon in this domain – ‘batch mentality’. While this phenomenon is typically associated with MBAs, this can apply to engineers and other professionals also.
The dynamics of the phenomenon is simple - MBAs tend to compare their career progress with that of the other MBAs from their batch - even after many years of completing their MBA. This is especially true for MBAs from premier institutes who get hired as Management Trainees in reputed organizations – often at a higher responsibility level and at a higher salary as compared to MBAs from less reputed institutes. Since the salary is often used as an indicator for career progress, batch mentality has implications for our domain here (salary negotiations and psychological contract) – across the various stages of the employee life cycle.
In the hiring phase, the prospective employee might expect to come in at the same or higher salary level as compared to the employees in the organization who are from the same batch/similar batches. Sometimes, they state this upfront. Sometimes, they will just assume/expect that it will be done. That is when the trouble begins.
The batch (or the number of years of post qualification experience) might not be a good indicator of the capability of the employee – especially after a few years of completing the degree. Different individuals could have taken different career paths and this could have resulted in different skills and different experiences. Also the relevance of these skills and experiences vary significantly across organizations. However, in the absence of other measures to compare one’s capability level with that of the employees in the new organization, the batch serves as a useful indicator (or at least as a reality check) for the prospective employee.
In my opinion, the best way to deal with this is to be as open as possible with the prospective employee regarding how his/her experience and capability is being compared with those who are working in the organization. For example, if one is joining a consulting firm after a few years in internal HR roles, he/she might come in at a lower salary/lower responsibility level as compared to those who joined the consulting firm from the campus as management trainees. This happens because consulting experience might be of more value in a consulting firm. In such a scenario, it is much better to state this upfront and let the candidate take an informed decision on whether or not to join the firm. Similarly, if the firm has a practice of pegging the consistently high performing employees who have come in through the management trainee program at a higher salary level as compared to lateral hires with similar years of experience (even if they have studied in comparable institutes), this should also be stated upfront. Again, the candidates should seek specific clarification on these aspects if it is important for them and if the organization hasn't proactively shared those details with them.
Of course, some candidates might decide not to join. However, this is a much better scenario as compared to them joining the firm, feeling cheated, becoming disengaged and possibly leaving the firm fairly quickly. Please note that the organization has also to guard against the possibility that existing employees (especially the consistent high performers who have come in through the management trainee program) might feel that their psychological contract has been violated if lateral hires (from same/similar batches) come in at the same or higher salary and responsibility level.
Similarly, employees who join the organization as management trainees, might display a tendency to compare (‘benchmark’!) their career progress with others from the same batch of management trainees – even years after they have moved into different jobs (and different career paths) after completing the management trainee program. As we have discussed earlier, usually, these comparisons are not very valid – especially after a few years of completing the management trainee program. However, this does not prevent them from developing some sort of entitlement mentality (i.e. expecting that their salaries will also be increased/they will also be promoted along with the other management trainees from their batch).
To counteract this, the organization should make it explicit that once they complete the management trainee program, they won’t be treated as a batch and each person’s career (and salary growth) will be dependent on the performance, demonstrated capability, role, potential etc. Hence, it has to be communicated explicitly that no 'batch parity' will be maintained. Of course, a greater amount of transparency around the policy/process for deciding promotions and salary hikes will minimize the chances of the psychological contract being violated.
Please note that the employees will have a greater need to compare their salary and responsibility level with that of others, when they don't have better indicators to figure out how well they are doing in their careers (and to figure out if they are being treated fairly by the organization. Hence making these alternative indicators available (and educating the employees on the same) and also generating confidence in the people management processes governing salary hikes and promotions are critical in addressing the 'batch mentality'.
In the next post in the series, we will look at a some broader considerations related to psychological contract in business organizations.
Please let me know if you have any comments/suggestions at this stage!
Sunday, March 31, 2013
Of salary negotiations and psychological contract: Part 4 (after resignation)
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 in the series (see Part 1: dramatis personae) , we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second post (see Part 2: before joining) we examined the interaction between the employer and the employee before the employee joins the company and its impact on psychological contract. In the third post (see Part 3: after joining) we looked at the interaction between the employer and the employee after the employee joins the company and examined how these interactions are influenced by (and influence) the psychological contract.
In this post, we will turn the spotlight on the interaction between the employer and the employee after the employee submits his resignation and explore its impact on psychological contract (and how the psychological contract influences those negotiations).
The salary negotiations that take place during this phase (after the employee submits his resignation) are the most complicated ones. One of the key components of the psychological contract in any relationship is the expectations/assumptions about the continuity of the relationship. Here the expectations/assumptions vary widely – across various employees and across various organizations. Hence there is a very high possibility that the expectations (assumptions) the employee have are very different from the expectations (assumptions) that the employer has.
In some organizations, not questioning the continuity of the employment relationship is a necessary condition for any salary negotiations and hence once the employee submits the resignation, the organization does not negotiate at all. Thus the psychological contract prevents salary negotiations in this case. Other organizations have varying degrees of openness for renegotiating salary/making a counter offer once an employee submits his/her resignation. However, these negotiations throw up many complicated issues – for both the employee and the employer. The act of submitting the resignation (or not preventing the circumstances that lead to the resignation of the employee) often creates irreparable damage to the psychological contract for the employer and the employee (unless both the parties believe that they themselves were at fault - at least in part - for creating the situation).
If the employer negotiates with employee who has submitted the resignation and manages to retain him/her by making an offer with a higher salary, it might be perceived as a violation of psychological contract by the other employees. Once it becomes known that it is culturally acceptable to submit the resignation and renegotiate the salary, it might encourage other employees to follow suit creating long term damage to the organization culture. Even the employee who managed to get the salary hike might find it difficult to digest that the organization did not recognize his contribution/value till he put in his papers!
It is interesting to note that there is another psychological contract involved in these situations. Since the employee who managed to get the offer from a new organization would have gone through selection process (that would have involved multiple interactions with the organizational representatives of the new organization) his/her psychological contract with the new organization would also have got formed – at least to some extent. Taking the offer and negotiating with the current employer is usually a violation of that psychological contract!
Another variation of this theme is when an employee resigns from the organization, joins another organization and comes back to the first organization within a short time period with a higher salary and possibly at a higher responsibility level. If this happens in quite a few cases, it can be highly damaging for the psychological contract with the other employees. Hence organizations should have clear norms for rehiring. Keeping all these in mind, my opinion is that salary negotiations after submitting the resignation make sense only under exceptional circumstances.
In the next post in the series, we will look at a special phenomenon in this domain – ‘batch mentality’ and its implications for the psychological contract during the various phases of the employee life cycle.
Please let me know if you have any comments/suggestions at this stage!
In this post, we will turn the spotlight on the interaction between the employer and the employee after the employee submits his resignation and explore its impact on psychological contract (and how the psychological contract influences those negotiations).
The salary negotiations that take place during this phase (after the employee submits his resignation) are the most complicated ones. One of the key components of the psychological contract in any relationship is the expectations/assumptions about the continuity of the relationship. Here the expectations/assumptions vary widely – across various employees and across various organizations. Hence there is a very high possibility that the expectations (assumptions) the employee have are very different from the expectations (assumptions) that the employer has.
In some organizations, not questioning the continuity of the employment relationship is a necessary condition for any salary negotiations and hence once the employee submits the resignation, the organization does not negotiate at all. Thus the psychological contract prevents salary negotiations in this case. Other organizations have varying degrees of openness for renegotiating salary/making a counter offer once an employee submits his/her resignation. However, these negotiations throw up many complicated issues – for both the employee and the employer. The act of submitting the resignation (or not preventing the circumstances that lead to the resignation of the employee) often creates irreparable damage to the psychological contract for the employer and the employee (unless both the parties believe that they themselves were at fault - at least in part - for creating the situation).
If the employer negotiates with employee who has submitted the resignation and manages to retain him/her by making an offer with a higher salary, it might be perceived as a violation of psychological contract by the other employees. Once it becomes known that it is culturally acceptable to submit the resignation and renegotiate the salary, it might encourage other employees to follow suit creating long term damage to the organization culture. Even the employee who managed to get the salary hike might find it difficult to digest that the organization did not recognize his contribution/value till he put in his papers!
It is interesting to note that there is another psychological contract involved in these situations. Since the employee who managed to get the offer from a new organization would have gone through selection process (that would have involved multiple interactions with the organizational representatives of the new organization) his/her psychological contract with the new organization would also have got formed – at least to some extent. Taking the offer and negotiating with the current employer is usually a violation of that psychological contract!
Another variation of this theme is when an employee resigns from the organization, joins another organization and comes back to the first organization within a short time period with a higher salary and possibly at a higher responsibility level. If this happens in quite a few cases, it can be highly damaging for the psychological contract with the other employees. Hence organizations should have clear norms for rehiring. Keeping all these in mind, my opinion is that salary negotiations after submitting the resignation make sense only under exceptional circumstances.
In the next post in the series, we will look at a special phenomenon in this domain – ‘batch mentality’ and its implications for the psychological contract during the various phases of the employee life cycle.
Please let me know if you have any comments/suggestions at this stage!
Of salary negotiations and psychological contract: Part 3 (after joining)
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 in the series (see Part 1: dramatis personae) we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second post (see Part 2: before joining) we examined the interaction between the employer and the employee before the employee joins the company and its impact on psychological contract. In this post, we will turn the spotlight on the interaction between the employer and the employee after the employee joins the company and examine and how these interactions impact the psychological contract.
The salary negotiations that take place during this phase (after the employee joins the organization) are qualitatively different from those during the previous phase (before the employee joins the organization). This is because of the fact that by now a psychological contract has already been formed. The existing psychological contract will have a big influence on the salary negotiations from now on. Of course, the psychological contract can (and does) get modified by the negotiations at this stage. But the changes to the psychological contract at this stage are incremental changes (evolution). Thus, at this stage, the impact of psychological contract on the salary negotiations is much higher as compared to the impact of the salary negotiations on the psychological contact!
In general, the existing psychological contract makes it difficult for the employee to renegotiate the salary – assuming that there is a regular process for reviewing the salaries that is performance linked and market benchmarked. Most of the negotiations happen at this stage because of the ‘imperfections’ in the previous stage (problems/issues that come up because of the interactions during the phase before the employee joins the organization). For example, if an employee has been promised during the interview stage that that his salary will ‘catch up’ with that of the existing employees, once he proves himself in the organization and if ‘catch up’ never happens (or if it takes too long) the employee might feel that his psychological contract has been violated. Like I had mentioned in part 2 of this series, organizations should be more careful and specific when they are making such promises (and the prospective employee should seek clarifications or specific details - like how long it will take and what would qualify as proving oneself - if the organization does not do so).
There is another type of violation of psychological contract that can occur. This can be traced to fundamentals of the compensation philosophy of the organization – does the organization pay the employees based on what they deserve (within the constraints of what the organization can afford) or does the organization pay the employees as little as it can get away with? This comes into play in a situation where there is an industry downturn (making it difficult for the employees to change jobs) but the particular organization is doing well (growing reasonably fast with healthy profits). In such a scenario the organization can afford to give the employees good salary hikes. But it can choose not to do so (or choose to give a very low salary hike) because even without the salary hike it can retain the employees. This certainly provides short term gains. It can also be explained away in terms of salaries being market benchmarked. However, this will violate the psychological contract and will lead to a situation in which the employees (especially very valuable employees) leave the organization as soon as the job market improves (going by the same logic the organization had used, the employees should leave the organization when the market will pay more). No amount of talk about ‘employees being the biggest asset’ and ‘building a great organization together’ will undo the damage that happened to the loss of trust. Some of the IT organizations in India have learned this lesson the hard way!
Another interesting phenomenon observed during this phase is the so called ‘entitlement mentality’. This happens when an employee (or a group of employees) feels that he (they) should get a salary hike (or a promotion) because another employee has been given a salary hike or a promotion. While this is usually interpreted as an ‘attitude problem’ on the part of the employee by many of the organizations, there are significant contributing factors to this from the organization’s side. Often, there is no clearly defined promotion policy or policy/process for ‘out of turn’ salary increases. When the employees are not clear as to why somebody has been given a salary hike or a promotion (and why they haven’t been given the same), it is ‘normal’ (in the statistical sense of the term) for them to feel that their psychological contract has been violated. The organization can counteract this to a large extent by having a clearly defined policy for salary hikes and promotions and communicating the same to the employees (and to the prospective employees). Yes, there could be factors related to employee attitudes (e.g. ‘superiority illusion’) that are also operating here and they need to be addressed at that level (Please see ‘Performance ratings and the above average effect' for details).
Somewhat related to this is the situation where new hires join the organization at a salary higher than that of the existing employees at the same responsibility level. In such a situation the existing employees might feel that their psychological contract has been violated. Unless the organization can clearly demonstrate to the existing employees that there is a valid reason for new hires coming in at higher salaries (e.g. they bring in a particular skillset that is not available within the organization and that that skillset enjoys a higher salary level in in the market), this is bound to happen. This situation will also encourage the existing employees (those among the existing employees with skillsets that are highly sought after in the job market) to renegotiate their salaries.
I am not in favor of frequent renegotiation related to the salary. It puts too much strain on the relationship and on the psychological contract. However, in some of the organizations, it might be culturally acceptable to do so and in those contexts the employee might be able to manage this without damaging the psychological contract too much. I have come across organizations where the best paid person is ‘a great performer who is always on the verge of quitting’. However, my personal opinion is that this kind of brinkmanship creates mistrust and stress and that it is not worth it from a long term perspective.
It has to be noted that existing psychological contract also makes it difficult for the organization (represented by its representative like the managers) to reduce the salary of the employees, to be overly demanding or to terminate the employment. A special situation gets created when there is a change in the manager of the employee as the new manager hasn’t yet formed the psychological contract with the employee. Usually, the new manager does accept at least some part of the existing psychological contract (or at least what the new manager considers to be the existing psychological contract). However, if there is a significant leadership change, with many people in the reporting chain of the employee changing, this might not happen (especially if the new set of managers have been brought in to 'transform the organization' and that transformation involves significant changes to the way people are managed in the organization). Thus, the existing employees might feel hassled as they might feel that their psychological contract has been violated and they don’t have the opportunity to address the violation. On the flip side, this change in managers/leadership also makes it easier of the existing employees to renegotiate their salaries (at least in the case of those employees who are in a position to negotiate)!
In the next post in the series, we will take a closer look at the salary negotiations that take place after the employee submits his/her resignation and explore 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!
The salary negotiations that take place during this phase (after the employee joins the organization) are qualitatively different from those during the previous phase (before the employee joins the organization). This is because of the fact that by now a psychological contract has already been formed. The existing psychological contract will have a big influence on the salary negotiations from now on. Of course, the psychological contract can (and does) get modified by the negotiations at this stage. But the changes to the psychological contract at this stage are incremental changes (evolution). Thus, at this stage, the impact of psychological contract on the salary negotiations is much higher as compared to the impact of the salary negotiations on the psychological contact!
In general, the existing psychological contract makes it difficult for the employee to renegotiate the salary – assuming that there is a regular process for reviewing the salaries that is performance linked and market benchmarked. Most of the negotiations happen at this stage because of the ‘imperfections’ in the previous stage (problems/issues that come up because of the interactions during the phase before the employee joins the organization). For example, if an employee has been promised during the interview stage that that his salary will ‘catch up’ with that of the existing employees, once he proves himself in the organization and if ‘catch up’ never happens (or if it takes too long) the employee might feel that his psychological contract has been violated. Like I had mentioned in part 2 of this series, organizations should be more careful and specific when they are making such promises (and the prospective employee should seek clarifications or specific details - like how long it will take and what would qualify as proving oneself - if the organization does not do so).
There is another type of violation of psychological contract that can occur. This can be traced to fundamentals of the compensation philosophy of the organization – does the organization pay the employees based on what they deserve (within the constraints of what the organization can afford) or does the organization pay the employees as little as it can get away with? This comes into play in a situation where there is an industry downturn (making it difficult for the employees to change jobs) but the particular organization is doing well (growing reasonably fast with healthy profits). In such a scenario the organization can afford to give the employees good salary hikes. But it can choose not to do so (or choose to give a very low salary hike) because even without the salary hike it can retain the employees. This certainly provides short term gains. It can also be explained away in terms of salaries being market benchmarked. However, this will violate the psychological contract and will lead to a situation in which the employees (especially very valuable employees) leave the organization as soon as the job market improves (going by the same logic the organization had used, the employees should leave the organization when the market will pay more). No amount of talk about ‘employees being the biggest asset’ and ‘building a great organization together’ will undo the damage that happened to the loss of trust. Some of the IT organizations in India have learned this lesson the hard way!
Another interesting phenomenon observed during this phase is the so called ‘entitlement mentality’. This happens when an employee (or a group of employees) feels that he (they) should get a salary hike (or a promotion) because another employee has been given a salary hike or a promotion. While this is usually interpreted as an ‘attitude problem’ on the part of the employee by many of the organizations, there are significant contributing factors to this from the organization’s side. Often, there is no clearly defined promotion policy or policy/process for ‘out of turn’ salary increases. When the employees are not clear as to why somebody has been given a salary hike or a promotion (and why they haven’t been given the same), it is ‘normal’ (in the statistical sense of the term) for them to feel that their psychological contract has been violated. The organization can counteract this to a large extent by having a clearly defined policy for salary hikes and promotions and communicating the same to the employees (and to the prospective employees). Yes, there could be factors related to employee attitudes (e.g. ‘superiority illusion’) that are also operating here and they need to be addressed at that level (Please see ‘Performance ratings and the above average effect' for details).
Somewhat related to this is the situation where new hires join the organization at a salary higher than that of the existing employees at the same responsibility level. In such a situation the existing employees might feel that their psychological contract has been violated. Unless the organization can clearly demonstrate to the existing employees that there is a valid reason for new hires coming in at higher salaries (e.g. they bring in a particular skillset that is not available within the organization and that that skillset enjoys a higher salary level in in the market), this is bound to happen. This situation will also encourage the existing employees (those among the existing employees with skillsets that are highly sought after in the job market) to renegotiate their salaries.
I am not in favor of frequent renegotiation related to the salary. It puts too much strain on the relationship and on the psychological contract. However, in some of the organizations, it might be culturally acceptable to do so and in those contexts the employee might be able to manage this without damaging the psychological contract too much. I have come across organizations where the best paid person is ‘a great performer who is always on the verge of quitting’. However, my personal opinion is that this kind of brinkmanship creates mistrust and stress and that it is not worth it from a long term perspective.
It has to be noted that existing psychological contract also makes it difficult for the organization (represented by its representative like the managers) to reduce the salary of the employees, to be overly demanding or to terminate the employment. A special situation gets created when there is a change in the manager of the employee as the new manager hasn’t yet formed the psychological contract with the employee. Usually, the new manager does accept at least some part of the existing psychological contract (or at least what the new manager considers to be the existing psychological contract). However, if there is a significant leadership change, with many people in the reporting chain of the employee changing, this might not happen (especially if the new set of managers have been brought in to 'transform the organization' and that transformation involves significant changes to the way people are managed in the organization). Thus, the existing employees might feel hassled as they might feel that their psychological contract has been violated and they don’t have the opportunity to address the violation. On the flip side, this change in managers/leadership also makes it easier of the existing employees to renegotiate their salaries (at least in the case of those employees who are in a position to negotiate)!
In the next post in the series, we will take a closer look at the salary negotiations that take place after the employee submits his/her resignation and explore 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!
Wednesday, March 27, 2013
Of salary negotiations and psychological contract: Part 2 (before joining)
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!
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!
Of salary negotiations and psychological contract: Part 1(dramatis personae)
“I feel cheated. If I had known this, I would not have joined this company”, said the frustrated employee. “We had given you a good hike over your previous salary. We had also explained the details of your compensation and benefits when we gave you the offer letter. Once you have signed the employment contract, it is not appropriate on your part to raise issues about it so soon. What somebody else get paid is none of your business”, replied the HR Manager.
This is a scene that gets enacted quite frequently across organizations – with unpleasant consequences for both the employer and the employee. I have often wondered what can be done about it. Based on my experience in the domain (from both sides of the fence!), I think that an exploration of the terrain from multiple perspectives is required to find a reasonable solution to this puzzle. This series of posts is an attempt in that direction. I also feel that while the ‘best solution’ is likely to be context specific, some general guidelines can be formulated.
In the first post of this series, we will begin by taking a closer look at the concept of ‘psychological contract’. We will also conceptualize salary negotiations in terms of the key stages in the ‘employee life cycle’ in which salary negotiations take place.
The psychological contract is a set of mutual expectations held by the employer and employee that might not be captured in the formal employment contract. While the psychological contract is ‘not on paper’, it is very much real and significant as it impacts how the employer-employee relationship evolves. It also influences the key decisions made by the employees like the decision on whether or not to put in discretionary effort and whether or not to leave the organization. Hence maintaining the psychological contract is critical for enabling positive employee relations. Please note that in the case of reasonably well-managed organizations (where a breach of the legal employment contract is unlikely to happen), employee exits almost always happen because of the perceived violations in the psychological contract. Repeated violations of the psychological contract can also prompt the employees to form unions to protect their interest.
Salary negotiation is not the only factor that influences the formation and evolution of the psychological contract. Psychological contract might have other dimensions like organization climate and culture, degree of empowerment, career growth, learning opportunities etc. However, salary negotiation is a very significant factor in terms of the degree of impact on the psychological contract.
For our exploration here, we will use a broad definition of the term 'salary' – to include not only the cash part of the compensation but also the benefits and perquisites. Hence our focus in this series of posts will be on those parts of the psychological contract that have something to do with expectations the employees have regarding the salary (including variable salary), benefits & perquisites and the expectations that the employer has on what the employees need to do to earn the same. They also include mutual expectations regarding how (how fast, by how much and based on what) these (salary, benefits & perquisites) will change during the employment relationship. Mutual expectations regarding if, when and how these can be (re)negotiated will also be included. We will assume that the 'employer' is represented by the managers of the employee (people in the reporting chain of the employee and also the HR managers).
Salary negotiations happen at multiple points during the tenure of an employee. However, for the purpose of our discussion here, we will conceptualize the same in terms of the salary negotiations at the following stages
1. Before the employee joins the company (when the ‘employee’ is still an outsider)
2. During the tenure of the employee (from the time the employee joins the organization till he/she submits the resignation)
3. After the employee submits the resignation (when the company is trying to keep the employee back by making a counter offer)
Of course, this is a simplified picture. For example, if stage 3 is successful, the game goes back to stage 2. After that, stage 2 & 3 can (and often do) get repeated later. Also, an employee can indicate his/her intention to quit without formally submitting the resignation.
We will explore each of the stages in detail in the subsequent posts in this series. We will also look at some interesting phenomena observed in this land like 'batch parity' and 'entitlement mentality'. In addition to this, we will look at some other dimensions of psychological contract not related to salary and their implications. For the time being, let us look at a few basic principles.
a. When it comes to forming expectations (psychological contract), what was left unsaid is often more important than what was said during the interactions between the employer and the employee. Psychological contract is unwritten, broad and implicit as compared to the employment contract which is written down, specific and explicit. Hence there is much more room for misunderstanding and misinterpretation.
b. Employees often carry assumptions from their previous employment experiences. Hence they might assume (without any input on the part of the new employer) that something will exist or will not exist in the new organization. Similarly employers (based on the behaviors of existing employees) might assume (without any input on the part of the employee) that the new employees will do or will not do something (See ‘Appropriate metaphors for organizational commitment’ and ‘Passion for work and anasakti’ for more).
c. Keeping in mind (a) and (b) above, it makes a lot of sense on the part of both the employee and the employer to surface and validate as many of the possible expectations and assumptions as possible (See ‘On what good looks like’ for details). However, this might conflict with the need to strike a deal quickly (e.g. to get the employee to accept the offer or to get the employer to make a job offer). It has to be noted that any shortcuts employed here can lead to long term pain even if they provide some short term gain.
d. The self image of the employee (and the self image of the manager) can have significant impact on the creation and evolution of the psychological contract. Interactions with the colleagues and team members also impact the psychological contract.
e. When it comes to psychological contract, ‘perception is reality’. Breach of psychological contract may occur if employees perceive that the company (or any of its agents like the managers), have failed to deliver on what they perceive was promised. It can also happen when the employer (manager) perceives that the employee hasn’t kept his/her end of the bargain. Since psychological contract was ‘not on paper’, often the parties don’t initiate a discussion immediately to check whether the perceived breach of the contract really took place. Usually the issue remains ‘underground’ for quite a while and by the time it surfaces it would have gained a lot of negative momentum.
f. Once the breach of the psychological contract occurs, it is often very difficult to repair. Hence prevention is much better than cure in this case!
g. On the positive side, psychological contract provides an excellent opportunity for the organization to engage with (and retain) the employees on multiple dimensions - transactional and relational. It can create a deep alignment between the employee and the employer and provide a sense of meaning a purpose to the employees. Hence it makes sense (for both the employers and the employees) to do whatever they can to actively shape and manage the psychological contract!
In the next post in the series, we will turn the spotlight on the interaction between the employer and the employee before the employee joins the company.
Please let me know if you have any comments/suggestions at this stage!
This is a scene that gets enacted quite frequently across organizations – with unpleasant consequences for both the employer and the employee. I have often wondered what can be done about it. Based on my experience in the domain (from both sides of the fence!), I think that an exploration of the terrain from multiple perspectives is required to find a reasonable solution to this puzzle. This series of posts is an attempt in that direction. I also feel that while the ‘best solution’ is likely to be context specific, some general guidelines can be formulated.
In the first post of this series, we will begin by taking a closer look at the concept of ‘psychological contract’. We will also conceptualize salary negotiations in terms of the key stages in the ‘employee life cycle’ in which salary negotiations take place.
The psychological contract is a set of mutual expectations held by the employer and employee that might not be captured in the formal employment contract. While the psychological contract is ‘not on paper’, it is very much real and significant as it impacts how the employer-employee relationship evolves. It also influences the key decisions made by the employees like the decision on whether or not to put in discretionary effort and whether or not to leave the organization. Hence maintaining the psychological contract is critical for enabling positive employee relations. Please note that in the case of reasonably well-managed organizations (where a breach of the legal employment contract is unlikely to happen), employee exits almost always happen because of the perceived violations in the psychological contract. Repeated violations of the psychological contract can also prompt the employees to form unions to protect their interest.
Salary negotiation is not the only factor that influences the formation and evolution of the psychological contract. Psychological contract might have other dimensions like organization climate and culture, degree of empowerment, career growth, learning opportunities etc. However, salary negotiation is a very significant factor in terms of the degree of impact on the psychological contract.
For our exploration here, we will use a broad definition of the term 'salary' – to include not only the cash part of the compensation but also the benefits and perquisites. Hence our focus in this series of posts will be on those parts of the psychological contract that have something to do with expectations the employees have regarding the salary (including variable salary), benefits & perquisites and the expectations that the employer has on what the employees need to do to earn the same. They also include mutual expectations regarding how (how fast, by how much and based on what) these (salary, benefits & perquisites) will change during the employment relationship. Mutual expectations regarding if, when and how these can be (re)negotiated will also be included. We will assume that the 'employer' is represented by the managers of the employee (people in the reporting chain of the employee and also the HR managers).
Salary negotiations happen at multiple points during the tenure of an employee. However, for the purpose of our discussion here, we will conceptualize the same in terms of the salary negotiations at the following stages
1. Before the employee joins the company (when the ‘employee’ is still an outsider)
2. During the tenure of the employee (from the time the employee joins the organization till he/she submits the resignation)
3. After the employee submits the resignation (when the company is trying to keep the employee back by making a counter offer)
Of course, this is a simplified picture. For example, if stage 3 is successful, the game goes back to stage 2. After that, stage 2 & 3 can (and often do) get repeated later. Also, an employee can indicate his/her intention to quit without formally submitting the resignation.
We will explore each of the stages in detail in the subsequent posts in this series. We will also look at some interesting phenomena observed in this land like 'batch parity' and 'entitlement mentality'. In addition to this, we will look at some other dimensions of psychological contract not related to salary and their implications. For the time being, let us look at a few basic principles.
a. When it comes to forming expectations (psychological contract), what was left unsaid is often more important than what was said during the interactions between the employer and the employee. Psychological contract is unwritten, broad and implicit as compared to the employment contract which is written down, specific and explicit. Hence there is much more room for misunderstanding and misinterpretation.
b. Employees often carry assumptions from their previous employment experiences. Hence they might assume (without any input on the part of the new employer) that something will exist or will not exist in the new organization. Similarly employers (based on the behaviors of existing employees) might assume (without any input on the part of the employee) that the new employees will do or will not do something (See ‘Appropriate metaphors for organizational commitment’ and ‘Passion for work and anasakti’ for more).
c. Keeping in mind (a) and (b) above, it makes a lot of sense on the part of both the employee and the employer to surface and validate as many of the possible expectations and assumptions as possible (See ‘On what good looks like’ for details). However, this might conflict with the need to strike a deal quickly (e.g. to get the employee to accept the offer or to get the employer to make a job offer). It has to be noted that any shortcuts employed here can lead to long term pain even if they provide some short term gain.
d. The self image of the employee (and the self image of the manager) can have significant impact on the creation and evolution of the psychological contract. Interactions with the colleagues and team members also impact the psychological contract.
e. When it comes to psychological contract, ‘perception is reality’. Breach of psychological contract may occur if employees perceive that the company (or any of its agents like the managers), have failed to deliver on what they perceive was promised. It can also happen when the employer (manager) perceives that the employee hasn’t kept his/her end of the bargain. Since psychological contract was ‘not on paper’, often the parties don’t initiate a discussion immediately to check whether the perceived breach of the contract really took place. Usually the issue remains ‘underground’ for quite a while and by the time it surfaces it would have gained a lot of negative momentum.
f. Once the breach of the psychological contract occurs, it is often very difficult to repair. Hence prevention is much better than cure in this case!
g. On the positive side, psychological contract provides an excellent opportunity for the organization to engage with (and retain) the employees on multiple dimensions - transactional and relational. It can create a deep alignment between the employee and the employer and provide a sense of meaning a purpose to the employees. Hence it makes sense (for both the employers and the employees) to do whatever they can to actively shape and manage the psychological contract!
In the next post in the series, we will turn the spotlight on the interaction between the employer and the employee before the employee joins the company.
Please let me know if you have any comments/suggestions at this stage!
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