Unintended Consequences of Salary Disclosure Laws – Why They Are Bad News For Applicants, Recruiters, and Employers
To address pay equity issues, New York City has joined 20+ other jurisdictions in implementing legislation aimed at prohibiting employers from obtaining salary history from applicants during the hiring process. On April 5, the New York City Council passed legislation outlawing salary history inquiries. The law takes effect on October 31, 2017. Once enacted, the new legislation will impose significant changes on the hiring process. The New York City law makes it an unlawful discriminatory practice for an employer to inquire about a prospective applicant’s salary history during all stages of the employment process. In addition, the bill would make it an unlawful discriminatory practice to rely on a job applicant’s salary history in determining the applicant’s salary, benefits or compensation.
While this law does have the noble intention of narrowing the wage gap between men and women, there are also some potential unintended consequences. These unintended consequences are particularly likely to happen to high wage, high skill workers, recruiters, and their employers. At best, this law will complicate the hiring process. At worse, it may adversely impact those it seeks to protect.
I write this from an executive recruiter perspective. In my 20 years of experience, the market sets predictable compensation levels for high demand talent, and there is rarely a huge degree of difference between what “Company A” and “Company B” pays. In the normal course of business, executive recruiters collect salary history for potential applicants. There are rarely instances where a potential applicant falls too far outside established salary norms. Obtaining this information up front helps the recruiter and potential employer benchmark the candidate, as well as manage expectations about a future offer.
By outlawing salary history inquiries, it becomes nearly impossible to advise candidates and clients on what is realistic or reasonable regarding candidate compensation. Employers will be put in a position where their offers will be a shot in the dark, versus the current system where salary and expectations are handled up front. This could lead to a lot of wasted interview time and effort by all parties because compensation is not aligned.
Job applicants are also potentially opening themselves up to earning less money due to the “back end” style of salary negotiation. Without having recent salary information on a potential applicant, it is very likely that companies will begin the negotiation process by making as low an offer as possible. Employers will have no incentive to make strong offers up front, as they risk paying more than they otherwise could. Candidates in turn are going to have to begin a negotiation process by fielding “low ball” offers, and will likely have contentious back-and-forth compensation discussions. Beginning a negotiation from the bottom of a range and working up is the exact opposite of how salary negotiations are currently handled. Under the current system, if an employer knows a candidate is currently earning $X, their initial offer is typically some increase above that current level. A good headhunter, or astute job seeker, can then determine if the offer is fair, or negotiate if the offer is not in line with market factors. If the starting point begins at the lowest possible number and works slowly up to what is minimally acceptable, strong talent risks leaving money on the table. In turn, employers will run a greater risk of losing good employees to companies with more aggressive offer practices.
The risk of miscommunication and misunderstanding also increases dramatically due to this law. People hear what they want to hear. If employers and executive recruiters are now put in a position where they will tell an applicant the salary range of the position up front, the candidate will likely fixate on the top of the range, while the employer is very likely to be focused on the bottom. Thus, when it comes time to negotiate the offer, the applicant and employer will likely be working from two very different starting points.
It’s important to note that our opinion comes from a very specific section of the employment market – low supply, high demand / high wage talent. There is strong evidence for serious wage gap problems in many sectors of the economy, and this law may very well improve those conditions in certain employment sectors. That said, as with any change, there are often unintended consequences.