There's a simple variant of the casino game roulette: black or red. Guess the color the ball will end up once the wheel stops. Traditional casino roulette has the house with an 8% chance (or more if you're a degen).
A new job's salary also can feel like you're "spinning a wheel", especially when salary is only revealed after an interview process. It's even more confusing with varying compensation structures, bonus incentives, and more.
One thing can drastically change the outcome of compensation roulette: your salary history. It makes compensation roulette a rigged game that rarely favors the player.
This article dives into:
- origins of the anchoring effect (funnily enough, it's a roulette wheel)
- salary history bans enforced in 16 different states
- how to play (and not play) compensation roulette
Economists manipulate us with a wheel
Two economists conducted a study. They rigged a wheel of fortune to land on either 10 or 65. After the wheel stopped, each participant was asked "what percentage of African countries are in the United Nations?"
Economists Amos Tversky and Daniel Kahneman found that the outcome of the roulette wheel affected the average participant's guess. When the wheel landed 10, the average guess was 25%; when 65, the average guess was 45%.
Their 1974 paper categorized this affect as "insufficient adjustment". Today, it is popularly known as the anchoring affect.
Salary History Bans
New York banned state entities from asking job applicants about salary history in 2017 with Executive Order 161 and started turning the needle. Today, 16 states and Puerto Rico prohibit employers from seeking salary history.
NY believes salary history ban is a tool to help reduce pay gaps for "women, workers of color, and workers who enter the labor market during recessions or downturns."
Their research uncovered:
- minority workers who changed jobs saw a 7.9% increase in their wages after the passage of salary history bans
- 68% reduction in the pay gap between white and minority workers when changing jobs
- 5% higher pay when workers moved to a job with a salary history ban compared to an unregulated employer
Also, NY wanted to help workers that have been absent from the workforce get back into an equitably paying job. During times of absence, salary can change with shifting job market conditions, inflation, and other factors. So, for example, a parent who prioritized children over a job can return to work on a compensation package that's more attuned to the current market.
Anchors are used every day in negotiation. The list price of a home is an anchor. A plumber quote for a leaking toilet is an anchor. A publicly listed salary range is an anchor.
But there's a problem with the majority of states not honoring a salary history ban. Salary history is a low anchor for future compensation. It's a predetermined low number on the rigged wheel of fortune.
So, you encounter an anchor. How should you deal with it?
Take it from the experts -- here is Harvard Business School's advice on handling anchors.
What if the other side makes the first offer?
You can counter the anchoring effect simply by recognizing the move. However, don’t make the common mistake of responding with a counter offer before defusing the other side’s anchor.
If someone opens with $100, and you want to counter with $50, before presenting your number, you need to make clear that $100 is simply unacceptable. If you don’t defuse the anchor first, you are suggesting that $100 is in the bargaining zone.
While imagining this conversation is useful, practicing this conversation live with another person is amazing for honing in on delivery, timing, and execution.
Our Take: Compensation Roulette
Compensation roulette is our oversimplified description of the anchoring effect of salary history. Here's how the tech world takes compensation roulette into account.
- Acknowledge employers probably know salary history. Whether it's legal or not, it changes how the salary negotiation starts.
- Immediately defuse low salary anchor. Take it out of the bargaining zone.
- Inquire heavily on how the initial offer was made. And, demand reasoning beyond "it's market rate". Employers use metrics, RVUs, and other calculations that help them come up with their offer.
- Look before actually wanting a job. An exceptionally large piece of leverage physicians have is walking away. The ability to say no to an offer will force salaries and compensation to be more enticing. Even if it's your dream job, make sure to look around. Desperation is not a good look.
- Get multiple offers. Extra points if it's a major competitor. Throw a counter anchor in the ground with a competitor's offer. Make it real that not closing you as a candidate will have even more consequences than missing out on a physician.
- Move jobs often when possible. If your current employer won't give you a salary increase, a competitor might. Not a bad idea to move around when given the chance.
- Start high, stay high. Initial salaries are the very first anchor. Take that into consideration in early career.