#106: How Salaries Are Set, And How to Negotiate Yours

Speaker A: Welcome to Stepsero. Modern work is a lot. Let's take it one conversation at a time. My guest today is Sandrine Bardot, a senior performance and reward advisor with more than 30 years of experience. In this episode, we talk about how salaries are actually set, what is genuinely negotiable that most employees never think to ask about, the psychology behind how we perceive pay is, and more. Let's get into it. Sandrin, welcome to Stepsero. Thank you so much for making the time.

Speaker B: Thank you so much. My pleasure to be here.

Speaker A: Matteo, let's start with the premise to this conversation. Most employees spend their career feeling confused about their compensation. Most of us don't really know how compensation really works, how it can be negotiated, what's behind the curtain. In a way, you are an expert in performance and rewards, including pay incentives, benefits, promotion practices, governance, and more. So I feel that you're the right person to help shed some clarity on the topic. Now, let's dive into first, the way compensations are set. What factors are at play, and what are the forces you think that most employees are really not aware of?

Speaker B: Okay, so in most companies, whether they are big or small, the first thing, uh, that starts is a budget. And that budget is based on a certain number of considerations. Those considerations include affordability, which is a big word to say, can the company actually have enough money to give some kind of salary increments to employees? Also, how the market is moving. Uh, typically you get some information even from the news of, oh, salaries will go up by 2.5%, 6.9%, whatever, depending on the country. And, uh, then considerations that are typically more, uh, customized to each company, which, uh, have to do with are we paying where we want to pay? So do we feel we are paying where we want to be paying our employees, or do we feel that we have a little bit of challenge recruiting people that might mean that we're not paying exactly where we need to pay, or do we feel that the market went down and we are still being quite generous with our salaries? Therefore, we might not need to move on or budget as much as the market movement. So this creates the budget. So within the budget, then there's an allocation per employee. And, um, typically the cfo, the head of hr in larger organization, the head of total Rewards, and, um, depending on your company, the line manager will have inputs as to how to distribute that pool of money across all the employees in the organization, and that will. Typically, in most companies, Most companies say we pay for performance. Unless you work in a, uh, civil government, typically it's a pay for performance approach, which means that if you have had your performance evaluated in a formal process with a performance rating which could be like outstanding, uh, or did not meet expectations or a number or a letter doesn't matter, that will be one of the drivers of the decision, often alongside with your position with respect to the salary range or to your comparison to your colleagues who are doing the same job. So two people who have the same level of performance and who are paid one is paid higher than the other for a work of equivalent value. The one who's paid less should theoretically receive a little bit more salary increment than the one who's paid uh, more in order to catch up. Assuming the one who's paid more is not like 200% above the market value obviously. So this process is more or less formalized depending on companies. The larger the company, typically the more formalized the process is, the smaller the company typically the process is less formalized and those rules may be applied, but currently maybe more at um, in my gut type of knowledge and not really with like uh, a matrix and an Excel spreadsheet that calculates and all this kind of stuff. But those are like typically the big uh, process things. And then there's an individual factor at play sometimes which is in some companies the process or the line manager says the employee is asking for something and there's an element where the employee needs to be a little bit more proactive in order to be uh, considered. And um, especially in smaller companies with lower types of margins, they tend to maybe not give a salary increment to everybody every year and then they proceed every two or three years based on the sense of urgency, how long the person hasn't had something or what have you. So those are kind of the general rules in most organizations.

Speaker A: This is one of the best breakdowns I've ever discussed about salary. It's very clear. Um, I'm taking a few notes and I'm, I'm a very visual person so I have mini drawings on my notepad. I'm curious about customization. I know you've addressed this in the past on a few podcasts, but how does customization really work? So if I, let's say I have a fairly structured situation, let's say it's uh, it's a scale up, not necessarily a full on corporate, not a startup in its early days, but a company that is fairly organized. Is there any such thing as customizing compensation for individuals or is that a fantasy?

Speaker B: So every year there are articles in magazines that talk about it, how to negotiate your package, blah, blah, blah. And um, they are never written by a reward person. So I would say it really depends on your organization and it depends on what you can customize. So you can always try to negotiate for more base salary for a bigger bonus. There are things that are more difficult to negotiate in most organizations, like asking for more vacation days. Probably not going to happen because there are laws and then you have like, difficulties to track it into a system and so on. So that's probably more difficult to get unless you're in a very small company where the management has, uh, some ways of thinking, thinking about it. Typically, health insurance is an area which, depending on the employer, you might have a little bit of customization. Those are, um, when your employer has enough employees and they can offer you some choice, like if you want to have a little bit more optical cover, a little bit more dental cover, a little bit more maternity cover or something like that. So in some cases there are like flexibility, but within boundaries, within rules. Typically that applies to bigger organizations because the insurer needs to have more lives that are insured, more people who are on the plan in order to have that kind of flexibility. Because if I take more dental cover, it's probably because I anticipate I want to do more work on my teeth, right? So I'm going to use it, um, more likely than if I don't take it. So obviously the insurance needs to make sure that they remain profitable. Um, other elements where you can probably more easily, uh, negotiate would be things around flexible working hours, working from home, um, you know, starting a little bit later than everybody else, because it takes you an hour and a half to drive to the office. And if you leave 45 minutes later, it takes you only half an hour, for example. So you might get some cases where one on one you can negotiate with your manager some kind of, uh, flexibility. And especially for people who are not working, uh, in an environment where the timing is so, um, important, like in retail or manufacturing, obviously those are different, uh, cases. Sometimes things about, well, being you can try to negotiate. And very often companies have an employee recognition plan and where they will say, oh, good work, and so on. And a lot of companies will have at least some kind of a voucher. Some companies will have a full system and an app and everything. But even for a simple company, they can buy a few vouchers where you can then choose what you use the voucher for. So you don't have to take, uh, for example, 200, uh, euros to go to the grocery store, you could choose uh, a uh, fine dining experience or something like that. Uh, this is where you can have a little bit of flexibility. And then in the very large organization there are few, few organizations, few operating world that are testing flexibility. Where for example Unilever is famous for having tried uh, to offer people a choice between getting a little bit. So they look at your total package, your base salary plus your target bonus and they say hey, if you want more base salary, we will take for example $5 of bonus to give you $1 of base salary on top. Why they do that? Because the variable pay is more at risk. So you don't want to transfer dollar for dollar because you might not reach your targets. And m, conversely if you want to say I want more variable pay because I'm super confident I think I'm going to crush my, my targets and so on. Maybe we will give you $1 less of base pay and you will receive 1.12 or 1.$25 more of variable pay. But those are experimental at ah, the moment. I have heard of experiments going about asking for less base pay and more vacation days and so on. But those are companies that are typically large and they need to have typically there's a software solution which has been customized uh, for them and so on. So either in the very small companies where there is nothing and therefore you can customize, or they're extremely large who are trying. But otherwise this kind of exchange typically doesn't really uh, happen.

Speaker A: And is it true, we always say that it's a lot better to negotiate early on. So when, when it's a time to join a company, it's, it's the time of you know, discussing the contract. Is that where you really need to nail your negotiation or are there chances to somehow make up for it along the year or along your career?

Speaker B: So one principle is always the sooner the better because there is a compounding effect in the following years. So obviously recruitment is the best time for you to try and negotiate a higher package. Another reason for that is that while there is an existing salary range for employees who are in the company, the uh, manager is usually quite constrained by the budget that I have described uh before in order to give the salary increments to, to their employees, even though they try to ask for an exception and so on, exceptions need to remain exceptions. So typically not all exceptions pass. However, at the time of recruitment the same manager might say I don't care, I need this person. If we don't get this position, we are not going to be able to do blah blah blah. And then they are often able to hire towards a slightly higher portion of the proposed salary range for the position because that's the pressure of we have the right person and uh, uh, we can hire them. You will typically be able to negotiate your base salary, not your target bonus because again target bonus is typically linked to your type of job and your grade and everybody's receiving 10%, 15% whatever the percentage, you might be able to negotiate a sign on bonus which is what you get when you enter the company. So that typically happens if you had for example um, equity that was about to vest at your prior employer, or you were about to get your bonus and uh, your annual bonus and the future employer somehow partially or fully compensates you uh, for that or even as part of the negotiation because you have critical skills and the organization is going to want to do something. Or you could ask for a retention uh, bonus which is something which uh, would typically be like an extra amount of cash but that would come after you have proven yourself and a period of time in the organization. So you're asking for it now, you're negotiating it and you might receive, might uh, operating word again receive it later on if you meet the conditions that you had agreed your performance conditions and you're still employed, for example. So like a uh, retention bonus of three months of my base uh salary to be received in one year if my performance is at least meeting expectations and I'm still employed in one year, for example. And sometimes you will be able to negotiate a few well being perks um, depending on the organization. So recruitment is a good time for negotiation. Uh, I would say another good time for negotiation is typically about six weeks to a month before the time that salary reviews are due because that is when your manager is working on the proposals. And also if you want a promotion would be uh, a good time to ask uh for it at that point in time. So be proactive and ask your manager about it. That would be my recommendation. And the third time, I would say say third and fourth would be one. If you have had a massive overachievement like a big project that just finished that was highly successful in the middle of the cycle, this is the time to ask, put it in writing. You will probably not get it because most organizations have cycles and they need to follow that and they don't really do off cycle things. Maybe they do but most of the time they don't. But at least it's recorded and what you need to get is A commitment that this will be taken into account at the next review. And that will make it much harder for the company to not give you something that you've already asked and you've gotten in writing that they will consider it. Consider that doesn't mean they will do it, but makes it harder. And the other time, I would say, is when somebody is leaving your team or is being promoted out or transferred. Transferred out of your team. So there's a vacancy on your team. And very often the workload is, um, spread across the existing members or you might be asked to take on the responsibilities of that other person. That's also a good time to ask because it gives you kind of a bit more leverage in the organization, and that is not taking advantage of the organization. I work, obviously now I'm a consultant, but I was for 20 years in house on the corporate side. It's fair and normal that you would consider that. And nobody's going to get offended, uh, that you're asking, what do you have to lose? Nothing. Worst case, you get nothing. Okay? You get nothing. You have, you don't have anything less than before. So that's nothing to lose.

Speaker A: That is so practical, Sandrine. And look, we, we have a little bit of time left. There's something I really want to pick your brain on. I know that you spoke about this in the past, and I found it very fascinating. There is something employees and managers alike, I think, are not really aware of when it comes to compensation. And that's the psychological aspect of it, in a way. The psychological component of pay, let's call it. And I know you touched quite extensively actually, on a few theories and frameworks of psychology that matter to compensation. Discussions you've touched in the past on equity theory, expectancy theory, obviously the mass law hierarchy of needs, among other things. Is there any theory, any framework you believe professionals should really get the grasp of for a better understanding of how their compensation might be set?

Speaker B: Um, I would say, and that would probably address more the people who work in hr. There is this concept around the perceived justice of a decision. And it's made of two components, procedural justice and distributive justice. So basically, it's the perception by the employee of, uh, whether distributive justice, for example, the amount of my bonus is fair, is right is what I was expecting. And procedural justice, which is more important is do I feel the process that was used to determine my bonus amount was fair or not. So a lot of companies have a black box when it comes to bonus calculation for Example. And that means that this whole process, procedural justice, is horrible for employees because they go like, oh, uh, the nephew of the owner, the friend of the manager, and the one who was, I have a bad word coming, but the one who was, uh, being too nice to the manager are the ones who are going to, uh, receive a better bonus. And so in reality, if I know how the bonus or the principles on which the bonus was calculated, I don't need to see the exact calculation. I need to understand that the process has been the same for everybody and the rule is fair. I might still not be happy with the amount of my bonus, but if I feel that how it was calculated was correct, then I will accept it much more easily as an employee. And I think this is really, really important because, uh, we don't have time to discuss it today, but as of recording, we're at the end of May, and in June, the EU Pay Transparency Directive is coming, uh, to life, theoretically. Okay. Most countries have not transposed the law yet, but this is a law that will not only require companies to communicate at recruitment, uh, time on salaries and the differentials between men and women in the organization for, uh, the jobs of equal value, but also will, uh, and they will have to produce reports on an annual biannual or every three years, depending on the size of the company. Smaller companies have less reporting, um, requirements, obviously with an action plan to address the differences between males and females pay levels in the organization. But also that means that every employee will have the right to ask to their employer, how am I paid compared to my peers? And the employer will have a timeline, which I think you will have to check. But I think it's two months to give an answer to the employee. To say, you are paid X. The average salary for people on the same level as you is Y. Here is why there is a difference, because if you don't explain the difference, communication is, uh, not going to work. And I think that those elements of explaining the process of how you determine pay inside the organization, whether you have a complicated process or a very simple one, are going to become more and more important. Because this is this aspect of procedural justice that needs to be addressed in the communication.

Speaker A: I love this. It makes so much sense. I give you one last flash question. If, based on everything we discussed, if every employee were to wake up tomorrow with full understanding and transparency into how their pay was decided to, so they know, say as much as you do or almost, what do you think would happen?

Speaker B: Wow. I think initially a little bit, um, of tension and Chaos, to be honest. And then I think things would settle down, uh, in the end. People do understand that there are differences in performance, that there are differences in, uh, personal capability, personal willingness. Not everybody wants to get a promotion next year, year because of different circumstances and so on, as long as they understand the process. I'm coming back to that because I really think this is fundamental. They might still not like the outcome, but if you prove that for the things that cannot be explained by good reasons, such as age, number of years of experience, performance and so on, if you can, and there's a percentage, which is still unexplained of difference, if that percentage is more than 5%, companies have to prepare an action plan. So if they know that an action plan is put in place to address the situation, you might still not be happy with the outcome. But you know it's going to change and you understand why it's going to change. So this is going to eventually normalize. But the introduction, uh, I would say will have, as HR professional, one or two rough years in terms of communication, and then everybody will get more used to it. Uh, both the employers will have better ways of explaining and educating line managers to transfer the messages to the employees. The employees will learn to understand when it is right to not be happy and when, you know, honestly, it's fake outrage because sometimes it happens as well. So we'll get out of it, I think, eventually.

Speaker A: Sandrin, you've been fantastic. Thank you so much for making the time and I look forward to having you back on the podcast.

Speaker B: Thank you so much.