Discussing Compensation

by Linda Stantial, Director of Career Planning at Massachussetts Institute of Technology, Sloan School of Management
Discussing Compensation

Setting the Stage

Deciding what you expect or want to be paid for a given position and discussing compensation with potential employers are important parts of a successful job search. During such discussions, both parties share the common objective of determining the fair market value for an individual's contributions to an organization. Each party also hopes to meet personal goals as well. Primary in the employer's mind is the desire to preserve equity among employees of similar backgrounds and responsibility levels. A company's internal salary structure developed over time dictates the boundaries within which the manager negotiates, balancing needs and expectations of new recruits with those of current employees. It is a delicate juggling act, particularly in light of the fact that salaries paid to graduating students are often high relative to salaries paid to individuals who have worked for a company for some time.

The student also brings personal agendas to the bargaining table. These typically include such factors as desire for pay-back on one's investment in an MBA, expectation that one's future salary will exceed prior compensation by a particular percentage (subjectively defined), and desire to fare well in competition with one's peers.

Learning to determine and negotiate one's fair market value takes time and practice. We offer the following material to help you prepare to approach salary discussions with comfort and confidence. The key thought to keep in mind is that information is power. Thinking through what information you require to make a decision and then gathering that information is the best way to guarantee that you will be fairly compensated in future positions.

Key Points About Compensation

1. Be prepared to discuss salary at any point in the interview process. Salary typically comes up during a second interview but may be discussed right away. Do your homework so you will be ready for the situation whenever it arises and not be caught off guard. If questions about salary come up before you know what a job entails, feel free to say you would like to understand the position responsibilities before discussing compensation.

2. Appropriate compensation is based on many factors relating to you, the company involved, and the position to be filled. Firms typically consider:

  • Your academic credentials
  • Your prior experience
  • Responsibilities of the position and special competencies required
  • Industry and regional norms
  • Location of job and local cost of living
  • Internal salary structure of company and associated salary policies
  • Your prior salary (even though this may not be relevant, given your new credentials)
  • Current business conditions
  • Salary data collected from other MBA schools.
Assigning a salary figure to any position is a complex process. Appreciate how many factors are involved and anticipate inequities between positions based on differing company or industry values and norms.

3. Most employers conduct careful research before setting salaries. Be equally well prepared with the facts. Start with offer data and information from other MBA programs (see the "Placement Reports" section of the CDO web site for Sloan data plus links to placement reports from other schools). But don't stop there. Ask fellow students, alumni or friends familiar with an industry, firm or geographic region what to expect. Review business journal articles on the subject. Consult information in Dewey Library, or publications available from relevant professional associations. In short, dig. This will allow you to present your needs and expectations clearly and confidently.

4. Don't assume all offers are negotiable or that the "sky is the limit". Although many managers expect to negotiate, some do not. They have already determined the "fair market value" for a particular position. In this case, their first offer is their best offer. You may damage your relationship with them if you ask for more. Here again, know your audience.

5. When considering compensation, look at the total package being offered. Compensation may take many forms, including salary, bonuses, equity, stock options, health and dental insurance, life insurance, pension plans, housing, moving expenses, family leave, child care benefits, paid vacation, extra leave without pay, a car, a personal computer, professional development (tuition assistance, professional meetings, etc.), loan repayment, interest-free or low-interest loans, a one-shot offer of $2-5K for miscellaneous expenses. Look at the big picture, not just salary. Expand your thinking about the ways an employer might reward you. Develop a list of your interests (i.e., what you want).

6. Be aware that issues of wage compression challenge many organizations today. Salaries of experienced personnel often fall, on both relative and absolute scales, behind salaries of new graduates. Firms struggle regularly with this problem in their efforts to retain long-term employees while simultaneously bringing new blood into the organization. This does not mean that you should automatically lower your expectations. Just be sensitive to the constraints employers may face when discussing your compensation.

Negotiation

Several years ago, Dr. Heather Hazard, a former Sloan faculty member, offered a seminar on "Negotiating Compensation with Employers". She shared the following useful insights at that time.

Negotiation is the process of arriving at agreement between two or more parties about one or more issues. The process is successful when:

  • Both parties feel good about the resolution;
  • It is efficient, achieving all possible gains for both parties;
  • Trust between parties is achieved for future negotiations;
  • A workable solution is reached;
  • The agreements are durable and stable;
  • The agreements involve no backlash for either party.
When preparing to negotiate, you must first define your needs and wants. Draw up a list of what you hope to get from your job or your employer, placing items in priority order. Be especially creative in thinking of non-monetary rewards you would find attractive. An excellent handout, "Prepare, Prepare, Prepare", developed by Professor Mary Rowe of Sloan's negotiations faculty, will help you develop such a list and prepare to represent your personal interests during employment discussions.

You also need to determine six figures in advance of any negotiation:

  • Your "best alternative to a negotiated agreement" (BATNA); this is the next best situation available to you if no agreement is reached.
  • The other party's BATNA (the amount they will have to spend to meet their needs in some other way).
  • Your ideal figure.
  • Their ideal figure.
  • Your opening offer (which should be higher than you will accept so you can lower your request and appear to be giving something up).
  • Their likely opening offer.

Few negotiations involve only a single issue. When negotiating compensation, discuss all forms of compensation you value. In sum, expand the pie before you divide it between yourselves.

You can influence the success of your negotiation as follows:

  • Encourage the other party to be flexible about their BATNA (tell them why you are unique; give them ways to "save face" if they alter their figure);
  • Be fully prepared;
  • Base your requests on objective information or criteria;
  • Listen carefully; slow down the tempo so you can hear everything;
  • Be comfortable with pauses rather than quickly filling periods of silence;
  • Avoid extreme requests which might lock them into their position;
  • Avoid naming absolute numbers (say "low $80's " rather than $82,500);
  • Look for opportunities to expand the assets of interest to either party, enhancing the chance for both sides to win.

If you have trouble negotiating for yourself, pretend you are doing it for someone else whom you respect and value. Try to depersonalize the discussion, and develop a sense that you are entitled to your request. Finally, recognize that practice improves your chance of success. Role play the discussion several times to anticipate what issues might surface and decide how you will handle them.

For more information on negotiation, we recommend visiting MIT's web site, "Negotiating Your Future", which we helped to develop.

This article was reprinted from the Sloan School of Management web site.

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