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…So yesterday I came across a great article from Tim Sackett wherein – as is often the case – he brought attention to an HR/marketplace best practice that I have always intuitively known exists, but never gave much thought to. From the piece (which again, you can read here):
We tend to pay same level experience internal employees less than we pay someone coming from the outside with the same experience, education, etc. This ‘discount’ is well known in the industry. Hometown discount. They’ve been here forever. They aren’t going anywhere. Why pay them more competitively?
…To be fair, the extent to which the above concept takes place in practice is governed by a host of factors; some of these factors come at the expense of external hires (e.g. in organizations with mature comp structures, any external offer is to some degree limited in size by how it impacts internal equity), while others come at the expense of internal hires (e.g. internal candidate’s salary histories and what they will work for are more well known commodities).
With that said, as Sackett gets at above, a core driver behind why internal talent tends to see smaller pay increases than external talent goes to leverage – most of the time, an external candidate has more of it because he or she can always walk away/stay with their current company if they don’t like an offer. An internal candidate can also turn down a new role if the package isn’t right (which by the way is an excellent negotiation play if one is far and away the most qualified applicant), but this can come with costs internally – most obviously in the form of limited future advancement opportunities.
For the above reasons, companies are often willing to low-ball internal talent, and said talent is often reticent to push back. I personally think it’s a poor play for a company to use with anyone they have a vested interest in keeping (why invest months or years of time and resources into developing a person only to pay them at a rate that makes them easily poach-able by an outside firm once you’ve trained them?), but for organizations willing to play the counter-offer game (or that have optimized the knowledge transfer process) this can be a good hedge to keep human capital costs low and free up budgets for business development and/or allocation of more dollars to top performers.
…So (without condoning) I get it.
In looking at the incentives behind why a company might adopt this strategy, however, it also makes sense to look at employee incentives: Through one lens, it perhaps makes sense to accept an internal promotion even if the offer is well below market value because:
1. It’s a net increase in total pay – even if a modest one. And;
2. The experience gained in the new role makes one more attractive internally *and* externally… allowing for a big payday down the road.
I briefly commented on the latter phenomenon here back in October, noting that frequent career movement is statistically the best way to maximize lifetime earnings. Gaining critical experiences almost always pays dividend over time.
…Just a Wednesday morning thought stream. As always, I reserve the right to be wrong.
Please share your thoughts in the comments section below.
Best,
Rory
