What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

Question

The following happened several years ago when working in another company, but same policy is also used where I work.

One of the managers had to fill up one position for some kind of technical support position. He had two options:

• try to transfer one of our colleagues that worked within another department OR
• hire a new person

After several interviews, he realized that had to choose between two very similar candidates:

• the internal one, who also wanted to be transferred.
• a good candidate

However, the internal policy specified that an existing employee could not transferred and have a salary raise more than x%.

I am wondering why having such a policy that puts a barrier for getting a good candidate for a job. An existing employee can be preferable as he/she is familiar with the company culture and also might be motivated by a change.

I asked a few persons about this policy, but nobody seems to have an explanation about why it is there.

Question: What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

Answer 1

What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

In general, salaries increase over time quicker for new talent versus the standard 3% yearly raise for an existing employee. This is particularly true in IT. This is why you see a 3 to 5 year stay at a particular place of employment when looking at an IT professionals resume or online profile.

Should an employer give raises to current employees to keep them in line with what the market will bear? Probably, but the company is betting that an employee will get too comfortable in their environment rather than seeking employment elsewhere to close the pay gap.

Further, in medium and large companies in particular, raises are approved by someone way higher up the food chain than an employee's direct manager. Meaning, even if the manager knows an employee needs X percentage of a raise to stay with the market, HR or upper management may not approve.

Sadly, in some fields like IT, you have to change jobs or get a promotion in order to keep with what the market will bear.

Answer 2

Obviously I can't speak to the motivation of an individual company but there's a couple of common rationales for this sort of policy:

• transferring an internal candidate brings the additional "negative" to the company of the fact that they have to then recruit to replace the transferred employee, so instead of having one employee learning a new role you have two.

• a candidate moving from another company is taking a greater risk than one doing an internal transfer and thus you need to make it more attractive - and a bump in salary is probably the most likely way to do this. In a way this is similar to what you see with things like mobile phone contracts - it's more difficult to attract a new customer then it is to retain an existing one, which is why new customers are the one's who get all the discounts and special offers thrown at them.

Answer 3

Mostly I think it's supply and demand.

Looking for another job is a lot of work. And it involves risk: the new job may turn out to suck for any number of reasons. You may have to move to another city, which is a lot of effort, can mean leaving friends, and requires you to learn a whole new community. So for most people, if you offered them a new job that pays the same as their current job, they'd stay at their current job. You need to pay them more to get them to change. Companies know this and act accordingly.

In my humble opinion, many companies have over-learned this lesson and hurt themselves. I've worked at a number of companies where management has rules that no employee can get a raise of more than x% per year, they regularly hire new people for more than they're paying current people with equal qualifications ... and then they grumble about how many people quit and how there's so little loyalty to the company. Well duh, you punish people for staying and reward them for leaving, and then you are baffled why people leave.

I worked for one company that had a policy that if an employee quit and was later re-hired, their salary when they were rehired could not be more than it was when they left. I suppose they came up with this rule to get around the potential loophole of someone who couldn't get a decent raise quitting and then demanding a bigger raise to come back. But of course the result was that employees who quit would almost never come back. If someone quit and went to another company for a nice raise, and then after 2 or 3 years decided he didn't like the new job, they were saying that he would have to go back to what he was paid 3 years ago, he'd have to give up 3 years of even cost of living increases. The only people willing to do that would likely be people who couldn't find a job anywhere else, i.e. the least qualified people.

Answer 4

There are companies that specifically address this problem, such as Netflix. They intentionally recalibrate salaries every year to the "top of your personal market", then pay people that maximum. So, you would get a bump every year to keep you incentivized to stay with Netflix instead of moving around.

That said, another (more likely) reason for this sort of policy is to prevent fraud. If my friend was the manager of the other team, he could hire me at a 50% pay raise and then I'd give him half of that bump. Remember - most policies aren't built from greed (the laziness theory) - they're built to stop something bad that just happened when the policy was written. If you could go back in the company's history, you'd probably discover an event similar to what I described.

Answer 5

Question: What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

Answer: Probability that a new employee will be willing to accept that offer is way lower than the probability that the existing employee will accept it. This comes from inheriting risk of changing jobs (I worked here for 5 years, no one fired me, no one gave me a hard time, everything is smooth and predictable. I should get some more reward to take a risk somewhere), reluctance to change anything (switching the job will require me to speak to people, take interviews, so I would rather sit where I am now)

Answer 6

Be careful not to mix up two different things here. This policy has nothing to do with whether an internal transfer can be offered the same salary as an external hire, even if it might have that side effect from time to time. Policies like this are designed to prevent employees from gaming the system to artificially¹ increase their salary and bypass normal pay-raise mechanisms.

Here's an example. When the 2008 recession hit, a company I used to work for halted all pay raises for a couple of years in order to avoid layoffs. We had quite a few employees figure out that they could leave the company and our cross-town rival would hire them for about 7% above what they were making before. Because of the recession, it would be a year or so before their team could get clearance to hire a replacement. Once they saw a job posting for their old position, they would apply and get re-hired (since they were the perfect replacement for themselves) - again at a salary about 7% above what they were making. In a little more than a year, they would end up in the same job they started in, but with a salary almost 15% higher than where they started.

When my company saw that this "technique" was being exploited by dozens of people for the sole purpose of bypassing the company's pay-raise system, they instituted a new policy: When re-hiring a former employee who has been away from the company for less than X amount of time, you can offer them no more than Y% above what they were making when they left. This made the game a lot more trouble than it was worth, and the practice soon halted.

The OP's case deals with internal transfers and not re-hires, but it's really the same game. The pay raises are typically smaller for internal transfers than for poaching a competitor's employee, but you can still exploit that system in the same way to job-hop and inflate your salary. Since you're staying within the same company, it looks less fishy on your resume as well.

Always remember, though, that rules like this are designed to discourage people from trying to game the system. They're not set in stone. If there's an internal candidate that would be perfect for your team and there's a justifiable reason to pay them that much, hiring managers can typically escalate the issue to HR or a VP and get an exception made. They might add a precautionary clause or two to their contract, but having management vouch for you can go a long way.

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¹ I use the term "artificial" here because the pay raises did not go through the normal raise process and were not based on merit. Employees were essentially engaging in price-gouging to inflate their own salary. They would repeatedly emphasize that the short-term cost of finding another replacement and training them to the same level of proficiency would cost more than that 15% differential. The company was very focused on short-term finances due to the economic situation, so the company would suck it up and re-hire them at the inflated salary, even when it was well above market rates. In the long term, that employee would cost the company considerably more than a comparable employee. Pay couldn't be reduced if the employee was performing adequately, and "because you're overpaid" wasn't considered a valid reason for firing somebody. Instead, these artificially-inflated salaries remained, reducing the funds available to use for giving everyone else raises.

Answer 7

The rationale for this is imaginary. Over time this company will retain complacent mediocrity or worse. All the new hires that are ambitious and attractive to the market will rotate out. Which I guess is fine if you are a government entity but not the case for a privately held one.

Answer 8

It's just to safe money. If you are in your job, most people just stay there and take what they are given, so this policy saves the company money. Employees don't compare to salaries elsewhere, and if they do and complain, they are seen as not "loyal" and their days in the company are often numbered.

The same employee looking for a new job usually knows that the best time to increase the money is when you start a new job. They often have two or three offers and therefore can demand more money and obviously pick whoever pays most.

So people who are already employed will most of the time stay even with little increases, while the company has to pay more when they hire someone new, or they won't get anyone.

Now while this practice seems to save a bit of money, it is doubly inefficient, because the company will lose its best employees every two or three years, who then start elsewhere with more money, stay for two or three years and repeat, and the employees are mostly not happy having to change jobs, but they have to to get a decent raise.

Answer 9

Many companies have policies on the percentage of increase when transferring employees, i.e., is this a lateral transfer, a promotion, is this a transfer to a revenue generating position, is this a lateral move with additional responsibilities; and the increase amount/percentage, would be aligned to the type of move. A transfer that is considered a promotion would have the largest increase percentage potential of all transfer types, specifically those transferring from an Individual Contributor role to Manager of people, etc. The percentages, however, typically are not enough to bring the current salary to someone they bring in new. In my experience, exceptions can be made with formal justification to as to why the internal transfer should have a compensation that is consistent with market standard. Institutional knowledge is invaluable in many cases and worth retaining in a stellar employee.

There are so many benefits from making the transfer fair and equitable if the internal candidate is the right fit. It demonstrates the company is invested in their employees, shows their peers there is a career path and retains that knowledge.

In short, these policies are in fact complex, real and can create animosity for employees who are getting the standard annual increase while the company is hiring people making far more than them. This does lead to job jumping indeed as mentioned in the original question. I have however also witnessed many "Job saves" where a critical resource is a flight risk or has received another offer, the leadership, compensation can and have proposed increases to match the market salary that they are being offered, regardless of the percentage. This is not good practice, as an employee should not have to resign to get market compensation, but it does happen.

Answer 10

Rationale assumes a strategic decision made deliberately

We think of companies as careful, methodical, and calculating. They aren’t. I’m in a meeting currently where we are being asked to provide a deadline for project completion. this follows a meeting where we spent two hours estimating poorly defined tasks for the sprint.

What is the definition of deadline? We don’t know. Does it mean done development? Done testing? Deployed to clients? Not specified.

So an hour is going to be spent mucking around to create a number which will not be terribly useful. Especially since the estimate is dependent on the number of developers available.

This isn’t meant as employer bashing. It is just a reality that organizing a large group of people is fraught with communications problems and loss of strategic goals. I’m sure the boss who wants the estimate has an idea in mind of what he wants, but in the room of the 8 people making that timeline, that knowledge didn’t arrive.

So I don’t know if there is a rationale behind it at many companies. I can see many companies just never getting around to looking at it that way or even if they do, never creating a customized way to combat it.

Answer 11

To me, it would seem logical to have a set maximum for salary increases between positions (at least before requiring serious approval / justification and review), because with that, you can manage employee's expectations of what they'll get with that promotion.

For example, if the employee thinks he's going to get $30k more per year as a raise, and you don't want to pay him that much more for example, you've got a TERRIBLE situation on your hands - You've just set up an existing employee for a situation where they'll consider leaving for more money, if you tell them you can't/won't pay them a certain salary, where they might otherwise have thought "Well the max I can get this raise for is 10%.... I can't get 30k. If I apply, I'm okay with just 10% for now."

This way, expectations are managed. If the employee transfers, they have a strong idea of what they'll get, the company saves themselves the hassle of having to risk a new hire from an outside source for that specific job, etc.

If the max % raise is too low, then it's just a silly notion in the first place. Upon hearing such a thing, I'd consider it a red flag about employee turnover at that company in their future