As seen on TLNT (April 26, 2017).
The practice of firms either requesting or requiring applicants to provide their salary history is coming under tremendous pressure as part of the overall push for pay equity for women. As a result, there are many new and proposed laws about the salary history request, including outright bans.
In my view, almost everyone who has written on the subject has failed to accurately list the reasons why firms have used the practice for so many years. So whether you oppose or support the new laws, understanding the many reasons why firms collect salary history should be part of your deliberation process.
Why companies ask for salary history
For decades it was quite easy for recruiters to find out a candidate’s salary history. As part of standard reference checking, recruiters could call firms where a candidate had worked and be provided with a great deal of information, including an applicant’s ending salary. But an increasing focus on privacy and numerous lawsuits covering the accuracy of the provided reference information have forced former employers to now provide no information beyond the basic dates that the candidate worked there. And with the more accurate reference option essentially gone, they are now forced to ask an applicant directly for their salary history.
All buyers want to know the possible price range of their expected selection. It’s a standard request in all business transactions, including recruiting. In addition, many firms request salary history also because their recruiting competitors do. And that is why many firms support the ban because it will guarantee an equal playing field across all firms.
If you want to fully understand why firms find it valuable, how they use it, and how in some cases it can even help the candidate, here is a comprehensive list of those justifications, uses, and benefits to the candidate.
The top 10 salary history uses are listed here, with the most impactful uses listed first.
1. Growth in salary is an indicator of continued performance improvement — In many cases an applicant’s actual pay is less important than the fact that they received frequent pay increases and even larger bonuses. This compensation progression is evidence of the candidate’s performance, their growth, and their career trajectory. And because a continuing increase in performance is an important selection and hiring criteria, revealing constant salary growth will make an applicant a top one.
2. It might indicate that someone is a hungry candidate — Salary data for each major firm is readily available on social media sites like Glassdoor.com. And as a result, many firms assume that smart applicants already know that by joining their firm, they are likely to get a significant salary bump. So if an applicant’s current salary reveals that they are paid less than what the target firm offers, by applying for a job, it demonstrates to the recruiter that the applicant is hungry for a “salary bump.” And being hungry may by itself cause an applicant to be considered a “top candidate” because that hunger will mean that an applicant is likely to stick with the hiring process until the end. Even if the firm takes a long time to make that higher money offer, the applicant becomes an even more prized candidate because they are much more likely to accept the offer.
3. It provides an outside/second opinion on a candidate’s value — It’s a common practice in business to gather data from multiple sources. So by providing an applicant’s salary history, it provides the firm a second “outside opinion” on what they are worth. And this second data point may keep the firm from undervaluing a candidate when they do decide on what to pay.
4. It reveals if a candidate can successfully negotiate — Asking the candidate to provide their salary history is, in part, a test of their negotiation skills. Good negotiators are highly valuable to a firm, regardless of the position they are in. Firms have found that the best negotiators will be able to withhold their current and future salary expectations until the end of the hiring process. So the question reveals if a candidate is highly desirable because they found a way not to reveal this strong negotiating point until the very end of the hiring process.
5. It quickly reveals those that we can’t afford — Providing it quickly reveals whether a candidate is even worth considering because they are too expensive. And eliminating “little chance candidates” early on saves the firm time and money. From the candidate’s perspective, of course, a salary history or current salary expectations might get the applicant rejected early. But on the positive side, an applicant won’t have to wait for months to find out that they really had no chance from the beginning. And some individual applicants might want the opportunity to accept a cut in pay. But from the firm’s perspective, that can be a too costly chance to take when there are so many other qualified applicants without major salary issues that are hard to overcome.
6. It shows that compensation matters, which attracts money-driven people — Some of the most desirable candidates, especially those applying for sales jobs, are strongly driven by money. Making it clear that a firm cares about money (by demanding salary history) can help to attract those who care a great deal about it. And because money-driven candidates can easily recall and in some cases are proud of their salary history, asking for it is not an impediment. So merely asking the question aids in identifying the desirable money driven people, while it simultaneously drives away others. If a candidate is driven by compensation, firms that focus on salary history may be their ideal target.
7. The question shows how a candidate can handle stress — Hiring individuals who can handle stress is important for most jobs. As a result, some firms wait to ask their salary-related questions until the interview. Because the question is a highly stressful question when asked in person, asking it can reveal how well a candidate can handle pressure. If a candidate demonstrates they can handle stress well by providing a quick and clear salary history or expectation answer during an interview, it may improve their chances of getting an offer.
8. Knowing the history of both genders allows a firm to take proactive action to fix inequities — When a firm collects salary information from both genders, it allows managers to quickly see the difference between the salary histories of applicants from both genders. Seeing the inequity can raise awareness and increase the probability that the firm will take proactive action to ensure they actually pay new hires of different genders the same. Gathering salary histories also helps a firm to supplement its salary survey data. And in aggregate, this new data can help a firm adjust all of the pay levels to meet changing market rates for that job.
9. Recruiters will guess anyway and that may hurt candidates — If a candidate doesn’t reveal their salary history, recruiters will be forced by their hiring managers to guess their current salary anyway. And they may guess too high, which will lessen a candidate’s chances of moving forward in the hiring process. So accurate salary information rather than being intrusive may actually help a candidate’s hiring chances.
10. It helps recruiters refine the firms they target – After receiving multiple salary history data. Recruiters can adjust and drop some firms they had been targeting once they realize that they can’t compete with them. By reducing their list of targeted firms, this saves the company time and money. Although narrowing down the field doesn’t help candidates, it does allow recruiters to spend more time with the candidates from firms that they can compete with.
Knowing salary history doesn’t mean they’ll pay less
Once you know why firms ask for salary history, it’s easier to see why an applicant’s salary history will likely have no impact on their pay, even though the “ban the salary history box” is going strong. There is no hard data, only a great deal of conjecture to suggest firms use salary history to pay less. That is because it simply doesn’t make good business sense to purposely or unintentionally pay women or other protected groups less.
Here are four primary reasons why providing salary history doesn’t impact a new-hire’s pay.
1. Most firms have a fixed compensation formula — Internal pay equity is such an explosive issue that firms can’t afford to make gut compensation decisions. Instead, all large firms use the same compensation formula for all new hires, regardless of an applicant’s salary history or their current pay (Google recently released its pay formula to the public). And even if a candidate does provide salary information, it is normally only seen by a recruiter. As a result, it’s highly unlikely that it will even be seen by the compensation analyst that makes the final salary recommendation.
2. Firms pay for jobs, output, capabilities, and performance, and not what other firms valued — It’s important to realize that what other firms can afford or what they value is not part of any firm’s compensation formula. The estimated value that an applicant can contribute to a firm is the value that they will be paid. In some cases, salary history may be especially irrelevant if the candidate is moving from another geographic region or industry.
3. There is plenty of evidence that gender diversity increases business results — There are several studies that reveal the business impact of hiring women. Including one from the University of Illinois that demonstrates that for every 1% increase in gender diversity, revenue goes up 3%. Because companies need to reflect their customer base, it’s a competitive advantage to retain its female employees with equal pay.
4. Salary information might allow a rogue firm to pay less initially, but the salary savings would soon be overridden by more expensive consequences — There are both federal and state laws that require equal pay between the sexes. But in addition to the legal consequences, there are many business and morale impacts of pay inequity. For example, if a firm initially paid a newly hired woman at a lower rate, the chances are increasing every day that the female employee would likely find out about the inequity almost immediately — there are now laws in most states that allow employees to talk freely about their current salary. But also with the growth of internal social media and texting, finding out about pay differentials gets much easier every day (one Google employee, Erica Baker, created and posted a spreadsheet on an internal social network where co-workers shared their salary information). And if a firm has significant pay inequities, inevitably, in the long-term, a firm’s underpaid top talent will simply quit. And they may even take a handful of a firm’s other women employees with them to their new firm. Simply put, it’s too expensive to pay unfairly.
Why some job boards require salary information
Some firms get so many applications that they have the luxury of purposely scaring away potential applicants who they judge to be only mildly interested. Although you might not agree with the logic, some managers insist that the application be longer, so that only “fully interested candidates” will spend the time to complete it. And the tedious requirement of providing a salary history is one of the most effective ways of scaring away barely interested candidates.
There are usually ways around the “salary box,” including applying through other channels like employee referrals or career fairs. Or in many cases, an applicant can circumvent the salary demand by entering narrative phrases or even random numbers in the salary information box. That will allow them to continue on and apply.
Even though most requirements to fill out “the salary box” on online job boards are legitimate, potential applicants also need to be suspicious that the information is not being gathered for other commercial purposes. Unfortunately, around the world, there are many examples of pseudo job boards or agencies which are really just data collection sites that spoof an unsuspecting applicant into providing valuable private information.
Recruiting agencies are different
Employment agencies differ from corporations because they almost always demand salary history and expectations. Because these agencies are only brokers, they don’t end up actually paying the salary of the people they recruit. Over time, these agencies have learned they will lose clients if they provide too many candidates who don’t fit the precise specifications (including pay expectations) provided by their client. Also, because referring candidates is not the same as hiring them, recruitment agencies and executive search firms may not be covered under each of these new “can’t ask” laws.
The fact that women are often underpaid is an indisputable fact. Although I personally support the attempts to remove salary history as a potential contributor to that gap, I am not convinced that it will have the desired impact. And because all the new laws allow candidates to volunteer salary history and information, the use of salary history will not likely completely disappear. As a result, it is essential that government agencies and academics continue to gather data in order to determine if the “salary history effect” is a major contributor to paying inequity. In my experience, there are many other factors that have a higher negative impact on women and minorities and those must be researched and quantified if the pay equity gap is to be reduced quickly.