Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 9/22/12
So, this question keeps coming up, "if I negotiate with a prospective employer, will I piss them off or ruin my chances?" I wanted to share the perspective of the person hiring and give you a couple of examples of what happened with people I have hired who were being paid below market wage to begin with. Some of you will probably think I'm a dick for saying some of this, but this is what really happens. Generally, your job is to try to get paid as much as possible and the employer's job is to pay you as little as possible. Getting upset about it won't help. Recognizing how to tilt the odds in your favor will. I consider the compensation negotiation a part of the interview and hopefully, you will understand why in the examples below.
What I write below applies to experienced hires anywhere and to small companies, but does not apply to standardized programs like analyst and associate programs at big firms (you usually can't negotiate those offers).
Don't be afraid to throw out the first number, just make sure it's a number you would be ecstatic to get. The company almost always make you throw out the first number and they make sure it's a number you are absolutely NOT ecstatic about.
How do they do this?
The first thing that the hiring manager will ask you about compensation is how much you are currently making or will get HR to ask you that question or have you fill out a form that asks you how much. I wouldn't answer this question directly and here's why: They ask you this so they can anchor their offer what you currently make. If your market value is $200 and you are earning $100, they can offer you $125 and most people think it's great because they received a 25% increase, not realizing they left $75 on the table or not knowing how to combat it. For any technique to be successful in a negotiation, you have to be willing to walk away. The easiest way to ensure you can walk away is to get competing offers or have a reasonable job now.
Let me give you a couple of examples of people that I interviewed and wanted to hire, that were (in my estimation), significantly underpaid when I interviewed them.
Candidate example #1
One very talented young lady (about 26 y/o) I was interviewing 5-6 years ago impressed me with her polish and technical abilities (she was a salesperson). I think she was making about $150k per year. Before I could make her an offer, she threw out that she should make $350k as that was the going rate. She gave me examples with concrete numbers. Of course, they were cherry picked, but it still made her argument. I respected her infinitely more for doing that and knew that since she would be negotiating contracts for us, including fee rates, she had a valuable skill set. Obviously, she would fight for higher fees. I loved that. I thought she was worth about $200K before we negotiated and about $300K afterwards. I saw her true colors during the negotiations and I loved it. Granted, she wouldn't get $350k from me, but I doubt she ever really expected to.
Notice that I never thought she was a jerk and never did she piss me off. My respect for her increased during the negotiation, significantly.
Candidate example #2
Ok, on to the next candidate for an unrelated position. Early in the process, I asked her how much she made currently and it was a little under $300K. She told me she thought she was underpaid, but never threw out a number and never really pressed the issue too much and certainly never gave any evidence of why she was underpaid. After getting to know her and her responsibilities, I concluded that market on her should have been about $500-600K.
But, because she didn't press me on compensation issues, I focused on the growth opportunities of the position, that I could give her a fancy functional title (Head of XX group), and that I could get her on TV and in print. The reason I told her about these things is because they seemed important to her and I knew I could deliver those things and pay her less than market while having her be excited about the job anyway. I ended up paying her a smidge over $300K. All the stuff I "gave" her didn't cost me a penny. In fact, some of them helped me just as much as they helped her.
She didn't negotiate hard and I knew, despite her seniority, I would have to babysit the people who worked for her. I got a deal on her and she had her strengths, but I knew I couldn't trust her to make tough decisions or negotiate for us. She should have negotiated harder. I definitely lost some respect for her because she didn't.
Both of the examples above were with people who currently had jobs, but did not have another offer in hand to leverage against me.
Try to refocus the discussion
Once you have some wins under your belt in your career and you go to test the job market, ideally, you can refocus the compensation discussion to something like a revenue share. If they ask how much you make, you can tell them, "Let's not worry about how much I cost you. I want to align our incentives and only get paid when I generate sufficient revenue.". Or something that contains that concept. The point is: it's much easier for someone to give you 10% of incremental revenue you generate than to have to write a big check andyou as a cost. However, you must make sure it's all in writing and get a lawyer to review it for holes. You don't want to be in a spot where you hit an absolute home run and are generating $50 million in revenue and they try to pull the rug out from under you.
Another example is this, let's say you're at a small fund and earn 2% of the carry and get a (relatively) small base. Let's imagine that this comes to a total of $500K in total compensation. If I was interviewing at a larger fund, I would not tell them that I got paid $500K, I would tell them that I got 2% of the carry. They're going to try to negotiate how much carry you get in the new firm, but you have already won. At this point, the only important thing is that you get a piece of the carry. You can come to something reasonable once both parties agree that you should get some of the carry.
Anyway, that's enough for now, but I'm happy to answer any questions you may have (I won't have all the answers, but I can try).