Chicago Booth Review Podcast How to Negotiate Salary

George Wu: If I can get us to focus on value, then I win. And a lot of the conversation, and for many reasons, it's easier to focus on cost in a lot of negotiations than it is to focus on value. But to the extent that I am successful in making it a conversation about value, then I'm going to be more successful. And if you are successful in making it a conversation about cost, you're going to be successful.

Hal Weitzman: Salary negotiations are difficult. Many of us hate talking about money, particularly with a potential employer. So what can you do to make sure you arrive at a fair wage? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. Today, we're looking at how to handle that tricky part of an interview process where you have to agree on a salary. Chicago Booth's George Wu teaches negotiation. He says, "The trick to a successful salary conversation is to prepare, give yourself options, and don't celebrate too soon."

George Wu, welcome to the Chicago Booth Review Podcast.

George Wu: Thank you. It's great to be back.

Hal Weitzman: We wanted to have you back because we want to talk about salary negotiations. And you and I were chatting one day when I bumped into you and said, "We must talk," because I'd seen all sorts of stuff floating around on LinkedIn about how to respond to the difficult questions about salary in a job interview. And I thought some of the advice was pretty duff, so I want you to set the record straight. Let's start with this classic quandary that people get when the interviewer says, "So what are you making now," and they don't know how to respond. First of all, why is that so problematic?

George Wu: Well, first of all, it's actually illegal today. Actually, when I first started talking about it to my MBA students, it was fine to say it anywhere. But now, think about in half the states, it's illegal. And some companies have actually committed to not asking this question. I think one of the reasons it's illegal is because it really does exploit an asymmetry that employers have in these situations. I think first of all, employees feel like they need to answer it, and that most of the time when employees are doing better in their lives, like our MBAs who are moving from job A to job B to job C, and typically over time their salaries are going to get higher. So you certainly don't want to start the next salary with the previous salary. I mean, you don't want to start and tell them how much you made at Burger King when you were 17 years old. I don't think that's going to help any of us.

Hal Weitzman: Okay. So I mean, it seems like one of the reasons people don't want to answer it is, as you said, is it sort of sets the stage for what your salary expectations are, right?

George Wu: For sure. It's going to start the conversation. I mean, we sometimes talk about that as anchoring it; anchor the conversation at a low number. I mean, you'd rather anchor it at the number that they have in mind rather than the number that is the worst thing that you can possibly imagine.

Hal Weitzman: And so I mean, you said that it's illegal, which doesn't mean that people don't ask. And it doesn't mean that they don't ask in different ways. What are some of the other ways that you've heard that people get around it?

George Wu: If they ask it even though it's illegal, it's probably not the right thing to say, "Well, Hal, that's not allowable question by statute number 23.12." I mean, they could say that, but I think it sounds pretty unwise, at least for me, for somebody to say that. I think the other reason why questions like this are so hard is that if you're the HR manager and somebody does what we used to call rope a dope to just try to avoid the question, try to change the conversation, I think a lot of people would just say, "Well, Hal, we can have that conversation, but can you answer my question? How much are you getting paid now?" And that'll keep on coming. And in class I call that badgering. It's not as if every HR manager will play that badgering role, but it's easy to do.

I guess the other thing that also makes it difficult is that if you feel in principle that you shouldn't share the answer, one of the things that game theory teaches us is that you probably have no problem sharing that answer if you're for whatever reason, making a lot more and coming down in salary, than a situation where you are making not so much money and coming up. And so any reasonable person-

Hal Weitzman: Right. In some cases, it might be information you want to reveal.

George Wu: For sure. I say to my students that those of them who are moving from for-profit jobs to nonprofit jobs probably aren't going to necessarily have an issue disclosing their high price for-profit job when they're negotiating for a nonprofit. But so in the case where you don't disclose it, the reasonable inference is that it's not advantageous for you to do so, and therefore they're going to conclude that you're not making very much money.

Hal Weitzman: So most people, if they were asked the question, would be hesitant to say, "Actually, in this state, that's illegal," though it sounds like that would be good information to have in your back pocket anyway.

George Wu: Sure. Certainly it's good for them to know, yes.

Hal Weitzman: And second, if you are ask it, most people are going to be hesitant, and that will be interpreted in a certain way. So I'm just wondering, how does that hesitancy affect the negotiation?

George Wu: I'm not completely sure what to do in this situation. I think a reasonable strategy is to answer the question, but quickly pivot. I think the worst thing to do is to avoid answering the question and then reluctantly coughing up the number at some point. And then you're off kilter, you're probably annoyed, and then you don't look good. So I think the reason to answer the question right away is that if you know you're going to be asked that question in a lot of situations, and the natural thing to do is to say, "Well, I'm making $120,000 now, but here's why it's not relevant," and pivot to what I would say is the other side of the bargaining zone, which is what they are willing to pay you and which is really about the value that you bring to that organization.

Hal Weitzman: Okay, well, we'll get to that, but something else I think that makes this complicated I want to get your thoughts on is HR managers, this is their job, their job, and sometimes you can feel like their job is to squeeze-

George Wu: Yes, that's right.

Hal Weitzman: ... you as much as possible. And you do this once or twice in every decade, and they do it every day.

George Wu: My joke is always, if you do it as often as they do, you have a bigger problem than this negotiation.

Hal Weitzman: Right, exactly. So it can feel a bit like, take a different negotiation example, to going to buy a car-

George Wu: Completely.

Hal Weitzman: ... where you feel like there's someone who's working you. That makes it harder, doesn't it?

George Wu: Of course. And of course it's personal to you in a way that you are a statistic. I mean, that's overstating it, but you are more of a statistic to them, and this is a job for you. And oftentimes it's an important job and it's maybe the only job that you have or the only job offer that you have right now. And that makes it really hard.

Hal Weitzman: Now, I mean, we know from a lot of work in negotiation that certain groups, people are more hesitant about talking about salary at all. So there's a general hesitancy and nervousness, let's say, about talking about numbers. And that part of the conversation many people find difficult. Do you think it's fair to extrapolate and say, for example, we know that women find it much harder to ... or let's say women tend not to ask for raises-

George Wu: Yes, that's right.

Hal Weitzman: ... to the same extent as men. Does that same kind of thing apply here where women will be less confident about this at all or might feel more under pressure to answer that question accurately, or-

George Wu: It's interesting, the data that I have about my MBA students, and maybe Chicago with MBAs are not representative, is there are two things that seem to be true, and there's lots of caveats with the statistics and things like that, is that women are more successful at negotiating extra money when they negotiate, but they get less money when they actually are successful. So you can think of them as they have a higher batting average, but they have more singles and doubles, and men have a slightly lower batting average, but they have doubles and triples and home runs and things of that sort. So one of the reasons why that data is hard to interpret is that the jobs that people negotiate are different. And there are lots of jobs that our MBA students get that there really is no negotiating. And if they try in spite of hearing from our career services people that they decide to negotiate and ignore the advice, they will be largely unsuccessful or almost completely unsuccessful.

Hal Weitzman: So it depends also at what stage you're at. If you're more senior-

George Wu: Absolutely.

Hal Weitzman: ... you're more comfortable about doing about salary, typically?

George Wu: I think it's that, for sure. But I think it's just that at the entry level, the McKinseys and the Morgan Stanleys are going to pay everybody the same. And the way I describe it is if they give you an extra $100, they have to give $100 to 500 people, and that's really costly. So whereas when you're a vice president or a CEO or CFO or whatever, there is only one CFO and one CEO. And the comparables are much thinner, and you're the person that they want and you're not interchangeable, and lots of other things. So the balance is much, much different when you're thinking about the kinds of positions that our MBAs take on relatively early in their lives versus the positions that they take on later on.

Hal Weitzman: Okay. And you said that the maybe one way of responding to this, and we'll get into this a bit more, is to pivot. In other words, you're saying, "Well, I'm not sure I want to talk about that, but I want to talk about something else." How do you recommend people do that without coming across as defensive or covering up some information that they should have revealed?

George Wu: Well, I would say, I mean, I think a reasonable strategy is just to, say, cough up the numbers, answer the question, and then move the conversation to their side of the bargaining zone, which is the value that you bring to them. And the way I always describe these kinds of negotiations is that if I'm selling something and we focus on cost, you're going to win, because If I can get us to focus on value, then I win. And a lot of the conversation, and for many reasons, it's easier to focus on cost in a lot of negotiations than it is to focus on value. But to the extent that I am successful in making it a conversation about value, then I'm going to be more successful. And if you are successful in making it a conversation about cost, you're going to be successful.

Hal Weitzman: So in simple terms, that means that my focus should be on the value that I would bring as a candidate, as a-

George Wu: If I were the HR manager, sure, for sure.

Hal Weitzman: And then the other person is going to focus on how they can bring down the cost of bringing me on board?

George Wu: Yeah. Well, and I think the other, of course, other way to have leverage in these negotiations and have leverage in all negotiations is your leverage in negotiation is at least the perception that you may walk away. And that's always your leverage. It's always something that you could do. Lots of times of course, walking away is very unattractive. If this is the only job offer that you have and you haven't worked for nine months and you have a couple hundred dollars in the bank, then that's very different than if you're in a situation where you have lots of offers or you've just started the process, and if you don't get this offer, sitting home and watching YouTube for a couple of months doesn't sound so bad. Those are situations where you actually do have a lot of leverage. And I think that communicating to the other side that you are willing to walk away in some kind of credible way is an important thing.

Hal Weitzman: So that's so interesting because we tend to think that, particularly as you talk about younger recruits, that people have no power whatsoever, and they'll basically just work for whatever they're paid. You're saying there's a lot of other factors that play into that, and actually you may have more power than you think.

George Wu: Yeah. I mean, I think, it's also in my data this is true, is that MBA students who have more offers are much more likely to negotiate. And who knows? There are lots of things that could be going on. I think that's sort of completely intuitive. I think there are two things that make sense. One is that they really do have other offers and that they say, "What the heck? If I negotiate, what do I have to lose?" But also, a lot of that is psychological, in the sense that the way I always tell my students is that just because you only have one offer, the way you should think about it is, what's the chance that you will get another offer soon? If you just started this process and you don't really even have a good sense of how the market is going to actually receive you, then it makes sense to not to just glom onto this one offer and basically give in to whatever they offer you, even if, again, you don't have any other offers for now.

Hal Weitzman: But that sounds like an interesting psychological trick. You project forward to think about, what if?

George Wu: Yeah, well-

Hal Weitzman: And then you kind of act as if you may have other offers coming?

George Wu: As long as it's realistic. I mean, I think the thing is if it's something where if it's a really tight, crummy market and you have an offer and you've been looking for a job for a year, then you probably should, quote ... we use the word "rationally," but it seems appropriate, just if you're forecasting what the next year on the market's going to be, it's not going to be one where five offers are likely to fall in your lap. On the other hand, if you've just come onto the market and it's a good market and something like the economy of a few years ago when it was a buyer's market, our MBA students were on many, many offers and things like that, that is a situation where it is a mistake to just get fixated on the first negotiation.

So I think the big thing here is what I tell my students is they should always think about what happens if they don't make a deal. And what happens is not the fact that they don't have an offer right now, it's their projection of what it will look like in the next three months, six months, whatever the relevant time horizon is.

And they can make two mistakes, of course. They can be overly optimistic about that market and say, "I'll have 10 offers in the next six months." And maybe that's the only offer that they will get. Or they can be overly pessimistic and say, "I have an offer. Why not just take this offer," and so on. And I think that's of course really, really hard to make a judgment, but that's part of being a good negotiator, to assess exactly what will happen if you don't make this deal.

I guess the other thing that also is appropriate is some people are going to be risk-averse. And it's not wrong to be risk-averse. I think it's wrong to be risk-averse if you are not cognizant about the real odds of getting another offer. If you say, "I know that I'm likely to get some more offers, but I really like to have this because it gives me peace of mind and so on," then that sounds, to me, appropriate.

Hal Weitzman: Carry the Two is the show that pulls back the curtain to reveal the mathematical and statistical gears that turn the world. Co-hosts Katie Witkowski and Ian Martin bring unique perspectives from the fields of mathematics and statistics to convey how mathematical research drives the world around us. With each episode tackling a different topic, subscribe to Carry the Two, part of the award-winning University of Chicago podcast network.

Okay, George, in the first half we talked about what to do when you're slightly on the back foot, that question about, "What are you earning right now?" And we talked about pivoting. Let's get more into the pivot and how you actually do it. One way I've seen of responding to the question about, "What are you earning," is to say, "Well, this is the salary range that I'm looking for." Is that effective?

George Wu: Not necessarily, I mean, I think it's an easy thing for people to say. It's a softer way of asking, and I think it's something that I think people find attractive. Of course, the inference is if you say, "Well, I'm looking to get between X and Y," I'm going to say, "Well, you only need X, or you probably actually need even less than X." So when you give a range, it's natural for at least some people to focus on the bottom part of the range.

Negotiation is a challenge in the sense that you can obviously make a mistake of being overly aggressive and ask for too much, and you can make a mistake of being basically not ambitious enough and just say, "Whatever you give me, I'll be happy." And the range is a way of trying to split the difference there. I think it feels comfortable for people. I don't necessarily think it's effective. Where I think it is effective is that if you ask the other side what the range that they're thinking for you, because in that way you're taking advantage of the weakness of something that you use and turning into a strength. So, "What are you thinking about the range in which you might be willing to pay me?" Probably you would say it more elegantly than that.

Hal Weitzman: "What is the salary range you had in mind for this position?"

George Wu: There you go. You should be teaching negotiation.

Hal Weitzman: Sorry, just explain. What's the strength of me asking you?

George Wu: Well, because in the same way that if I give a range, you're going to take the bottom to be what you're going to aim for, and I'm going to take the top, if I ask you as the employer, "What's the range," I'm going to look at the top.

Hal Weitzman: I see. That's interesting. So by throwing it to you, I can start to focus on the high end of what you are prepared to offer.

George Wu: Yes, that's right. That's one way of doing it, thinking of it, yeah.

Hal Weitzman: I see. Okay, that's interesting to me, because I had it in my mind that in a negotiation, typically it is better to be the first person to mention a number.

George Wu: In a lot of cases, yes. But I think part of it is, I think what makes negotiation challenging is in situations where you don't really know how much the other side is willing to pay you. So when you think about judging what the other side's bottom line is, and that could be cars, it could be houses, it could be lots of different things, it could be buying a company, I think what typically people do is they give a point estimate. They're going to need $10 million in order to sell this company, or they're willing to pay me 220,000, or they need $750,000 to sell this house, or whatever. And that's better than nothing. And you can get those numbers in lots of situations from public information and Glassdoor and these kinds of various websites and things like that for at least salary negotiations.

But I think a better way, at least that starts getting you to think about, let's just say, taking educated risks as a negotiator, to say, "What do you think the range is about the willingness to pay?" So you might say, "Well, I said my best guess is 220, maybe the most they'd be willing to pay me is 190, and it might be as high as 300." Now at least you understand a little bit of what the risks and opportunities are for starting low and high. And at least in that case, you say it like, "Well, if I'm really confident that they're going to pay me 190, then at least that should be something where really it is effectively my floor." But if you think of this in some situations, like for example, if you're selling something where you just don't know how much the other side is actually willing to pay, it may be something where this is some memorabilia that's kind of rare and idiosyncratic and things like that, and maybe you'll pay $100, but there's a chance that you'd pay $5,000 for that.

And I think there are a bunch of situations which are very, very asymmetric like that. And it seems like even if $100 is your best guess, it seems like a real misfortune if you miss out on the opportunity to get a couple thousand dollars if that's on the table. Now, if you are going to ask for something outlandish like a couple thousand dollars, then also part of your strategy needs to be to have to walk that down in a way in which you're not going to, say, loose face and so on. But again, I think the idea here is that even if you just recognize and say, "What's the lowest and the highest," and what does that tell me about how I would negotiate differently? Sometimes it will say nothing, but sometimes at least when the upside is a lot higher, people are going to want to try to take advantage of that upside.

Hal Weitzman: You said in the first half that in many states, it's no longer legal to ask people how much they're earning. Another thing that's happened in many states relatively recently is that they publish salary ranges-

George Wu: I completely-

Hal Weitzman: ... for new positions. So I'm guessing that most people will fixate on the top end of that?

George Wu: Yeah, of course, of course.

Hal Weitzman: But how did that change negotiations? It made everything a lot easier?

George Wu: Well, there are two reasons, I think, that there are salary ranges. One is that there's a lot of times when you don't want good candidates to apply who you're just not going to pay them. So if you're going to be kept out at 125,000 and somebody's being paid 200,000 and no matter how much they like this job, they're unlikely to come. So that's a waste of their time and a waste of your time for them to be apply and certainly for you to interview them and only to find out at the last minute that you can't even get within $75,000 of what they're looking for.

Hal Weitzman: Do you think that now we're in a situation where most people coming in, then when it comes to the salary part, they're fixated at the high end-

George Wu: Oh, for sure.

Hal Weitzman: ... and the HR department is fixated at the low end?

George Wu: I think of course, of course that's going to be the situation.

Hal Weitzman: Okay. But it certainly makes things less fraught, right?

George Wu: I guess so, yeah.

Hal Weitzman: I'm guessing a lot of what you teach is to say to people, "Prepare, write down what you think they're prepared to pay."

George Wu: Yeah.

Hal Weitzman: So now that takes that out of the equation.

George Wu: For sure. And I think in the same way that when you used to for cars, not that many years ago, but is that people would basically write a check for $30 or credit card for $30 to Consumer Reports, and they would send the report about what the dealer is paying for the car and all that kind of stuff. And that was pretty costly, and it would take time. And now that information is readily available. Anybody can find that information.

And so I think there are lots of things where, aside from the institutions and what applications look like and how job postings go and all that kind of stuff, and laws, the internet has just made information much more abundant in lots of situations. And that also includes things like presumably user boards like Reddit where people talk about these things. I have no idea whether those conversations are veridical; I'd imagine some of them are. But to the extent that you can imagine that it's very hard for people to talk in open about salary negotiations. And then if they can talk about them in these kind of closed forums, then there's a lot of certainly useful information that might come out there.

Hal Weitzman: Sure. Now the other pivot I wanted to ask you about is we talked about moving from salary to value, from costs to value. How would you recommend someone does that?

George Wu: Well, I think it's two things. One, focusing on what you bring to the table. Hopefully that's unique. And sometimes when you are negotiating with the HR director, that's not the person who interviewed you necessarily, that's not the person who you will be working for. So they are not necessarily the most appreciative people of those kinds of abilities. And obviously the person who made you an offer and you'll be joining them in their unit, they're the ones who are most appreciative of that. So when you're negotiating with the HR director, I think in a lot of ways it's very hard because for them, it's just going to be blah, blah, blah, blah, blah. For your boss or potential boss, who's the person who is really worried about you not coming, much more than the HR director, they're the people who I think oftentimes if you can get them involved in the negotiation, it's going to be-

Hal Weitzman: So try your best to make it a three-way?

George Wu: Absolutely. I mean, I think in some ways, the very best thing in a lot of situations is for the boss to come in and say, "I know that you don't want to cough up another $20,000 for this person, but Hal is really special." You are special.

Hal Weitzman: I appreciate that. So just quickly, because we have to wrap up, what are the three things you would tell someone who's going into a salary negotiation? What should they bear in mind?

George Wu: The first thing is that your power in the negotiation is jobs that you have in your pocket now and jobs that you will have. And the second part is the one that I think oftentimes people miss out on. It's that you don't have to have the job in your pocket right now, but you will have a job. Most people who are listening to this podcast are in job situations that they will likely have another job offer in the future. So that of course is really important.

I think one other thing about a job is that ... I studied psychology, and one of the things that my colleague, Richard Thaler, demonstrated was something called the endowment effect. And the endowment effect is the idea that once you own something, it's very hard to give it up. And we call this a demonstration of loss aversion, that losing something is twice as painful as getting something is.

And I think it can work in situations where you don't actually have ownership of something. And the example of a job is that, I tell everybody this for jobs and houses and all kinds of things, until you've signed on the dotted line, you don't have that job. And every time when you call your parents and your friends and you celebrate about this job, it's much harder for you to walk away. And of course, we want to celebrate when we have job offers, especially if they're job offers that are really unique. But in doing so, one of the things that we do is we reduce our leverage at the table. So very, very hard to do it, but do not ... it's easier to say it for a house: you don't own a house until you actually own a house.

And I think the third thing is, as I said before, what I encourage people to do is really obviously think about what the employer is willing to pay, the maximum they're willing to pay. But beyond that, also think about a range. And I think that oftentimes that one of the things that you'll appreciate is that why job negotiations is oftentimes really hard is that range is oftentimes very big. So you can imagine that I might make X or 2X, and that's a lot of money on the table. And certainly, just knowing that I think gets you hopefully to think about the negotiation differently.

Hal Weitzman: Okay. Well, George Wu, it was a great conversation, as always.

George Wu: It was fun.

Hal Weitzman: Thank you for coming back on the Chicago Booth Review Podcast.

George Wu: Thank you.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.