Salary negotiations are hard. It’s an information asymmetric game where the job candidate is trying to maximize their salary, and the recruiter is trying to hire them for the lowest price possible.
Both have remarkable incentive to misrepresent themselves. The recruiter’s strategy is to lowball the candidate – trying to get them to revise their self-worth downward. The candidate’s strategy is to highball – anchoring their perceived value to this higher value.
This is poisonous for a variety of reasons. The candidate may take a salary that’s less than they’re happy with, which is one of the most common reasons for attrition. It puts employers in the position of taking advantage of someone even before they’re hired. Most importantly, the game pits the prospective new hire against the very company that wants their loyalty!
We can use the revelation principle to turn this into a collaborative game where the optimal strategy for both the prospective candidate and the employer is to honestly say what they think. In fact, the 2007 Nobel Prize in Economics was awarded to the team that proved that any game where parties have private information can be turned into a game where the best strategy is to be perfectly honest.
But, what do we need to do to get this?
Let’s start with the Vickrey auction as inspiration. Standard auctions generally operate in one of three ways, (1) increase bids until we are left with a price only one person is willing to pay, (2) decrease price from a starting amount until someone is willing to pay, or (3) bidders secretly submit bids and the highest bid wins and is paid. Both of these encourage elaborate strategies that lead to suboptimal bidding. The Vickrey auction is just a slight variation on (3), where the highest bidder pays the second highest bid. See the Wikipedia page (linked above) for a sketch of the proof showing why it rewards honesty.
But that’s bidding. What about salary negotiations? All you need is two pens and two pieces of paper.
Write down how much you think you’re worth on a piece of paper. Have your prospective employer write down how much you’re worth to them. If they write down that you’re worth as much as or more than you think you are, go with your number. Otherwise, thank them for their time and go elsewhere.
Truthful – making an offer you think reflects your actual value
Untruthful – making an offer you think does not reflect your actual value
Underbidding – offering less than the candidate’s amount
Bidding – offering exactly the candidate’s amount
Overbidding – offering more than the candidate’s amount
The dominant strategy is for both you and the prospective employer to be honest. Sure, you may miss out on money but you’re already at an amount you’ve agreed you are happy with.
- The employer is equally incentivized for truthful bidding and truthful overbidding. Their bid doesn’t change how much they pay you, so the strategies have equal value.
- The employer is incentivized to truthfully underbid. If to them you’re not worth as much as you think you are, they should not hire you.
- The employer is discouraged from untruthful overbidding – they end up paying you more than they think you’re worth.
- The employer is discouraged from untruthful underbidding – they miss out on getting you at all.
Underrequesting – untruthfully requesting less than you’re worth
Overrequesting – untruthfully requesting more than you think you’re worth
For candidates, as with employers, the dominant strategy is to provide a value that is an honest assessment of your worth.
- You are discouraged from underrequesting. Of course you want to be paid what you’re worth! Being paid less than you think you’re worth greatly increases the chance you’ll soon be looking for a job soon – for a higher amount.
- You are encouraged to overrequest only if you think the employer vastly overestimates your self-perceived worth. If you think you’re worth $80,000 and overbid $100,000, you must believe that, given that the employer will offer at least $80,000, they are over 80% likely to offer $100,000 or more. In most cases this is unlikely.
- You are discouraged from overrequesting otherwise as it unnecessarily increases your risk of not being hired by an employer who values you at least as much as you’re worth.
To counter to candidate overbidding, of course, the employer must get an accurate representation of your skills. Or, at least, convince you that they have.
The outcomes and strategies of this game probably change considering that (1) you probably interview for multiple positions and (2) companies usually interview multiple candidates for a single position. I’ll have to think about what the implications are, as they could change.