The logical side of salary negotiating
Examples of game theory are all around us, and knowledge of it can directly impact one’s livelihood, such as when negotiating a salary raise. While there is an emotional and persuasive side between an employee and employer, there is also theory behind it that can help or hurt your case as an employee. According to the article, The Science Behind Salary Negotiations, there are different things one must keep in mind to get an optimal result.
While the employer inherently has greater power since they have something that the employee wants – a job offer and the ability to grant a higher salary – an employee can also persuade that their skills are greatly needed by the employer and thus should be paid more to not risk losing them. However, what separates this from other classic game theory examples seen in class is that this game is not continuous because counteroffers can be made until both players (employee and employer) reach an agreement.
Another aspect of salary negotiation is that when you present an offer, the article mentions that “Knowing relative market pricing allows employers and employees to make impartial assessments of situations” … “the highest and lowest prices you’re willing to pay will serve as guardrails for counter offer salary.” This is similar to the idea of auctions and market clearing prices. The lowest salary presented acts as a sort of reserve price for the employee because they will not be willing to accept an offer that is below this price. The highest salary acts as a price ceiling for the employer, because they will not be willing to give a salary offer that is above that, since it is outside of what the market prices are. So, any salaries offered by the employer between the lowest and highest market salary prices are theoretically able to be accepted, because they are all market-clearing prices that satisfy being ‘fair’ salaries that are accepted by the market.
Though there are other factors, such as the company’s budget, employer’s disposition, and the employee’s performance, it’s interesting to think about how there are principles from both game theory and auction pricing at play while negotiating salaries.
—
Article referenced:
Deskera Content. “The Science Behind Salary Negotiations: A Game Plan for Employers That Actually Works.” Deskera Blog, 29 Apr. 2022, www.deskera.com/blog/salary-negotiations-game-plan/#candidates-need-to-learn-the-art-of-persuading.