Is lower first year pay normal?

Question

I have had two jobs now in which the initial offer was below average market value and negotiation moved it only a little. In both cases, I took the position for reasons beyond money.

After a year at the first job, I received a significant raise.

Before pursuing the second job, I did quite a bit of reading on negotiation, realized some mistakes from the first time, and worked to improve my negotiation skills. The hiring manager at the second job agreed that I was indeed asking for a market value wage but said their internal pay structure simply didn't allow it. Their lower offer was because "I did not yet have experience working on their product". However, after I hired on, he then hinted that a year with the company could make a significant difference.

So, is it common for companies to pay significantly less the first year and give a sizeable raise after you are up to speed and they have seen your value? Or, is it just a flaw in my negotiation?

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Update after first year review:

I did indeed receive a significant raise from this company as well - roughly the same percentage as the last place gave after year one. Given two successful negotiations at the one year mark, I don't think it is a flaw in my negotiation skills. In the last negotiation, the conversation indicated that this answer was likely correct. At least in the case of this company, it seems to be owners not keeping up with market values & simply comparing to other employee salaries.

Answer 1

Private companies can pay whatever they want. Here are some reasons why companies may pay below market value:

It's a Privilege to Work There

I have a marketing agency client in Houston that pays 25-30% less than market value because they feel working for them is a privilege to those who want to have a high profile marketing agency on their resume. I have been in negotiations with this client before on behalf of my candidate and no matter how I positioned it, the offer was the offer and there was NO room for negotiation. This is not uncommon, especially in smaller companies.

They Don't Care

Some companies just don't care what the market value is and set pay structures up their own way.

They Don't Know

Smaller companies may not even have an HR department and it's the owner who might be calling the shots on salaries. They don't always keep up with market value rates and may just be deciding based on past salaries of other employees. They may not even connect the dots that their high attrition is a direct result of employees feeling underpaid.

The downside when companies think this way is more turnover.

With a couple of years under your belt at this company and if your pay has not increased, you are more likely to move on where the pay is better. This happens a lot. You as the employee can look at it as "education with pay". Meaning, if you stay underpaid, use the time wisely. Learn all that you can, volunteer for new projects and ask for training on new technologies. In 2 years, if the money hasn't changed, you'll have two solid years of experience and will be able to go somewhere else. Many professionals intentionally change companies/jobs every 3 years in order increase their salary. Stay at the same company for a long time (5, 10, 15 years), and you're going to settle for the 1 to 3% merit raises every year. Switch jobs and your future employer will pay top dollar to get you, especially if you work for one of their competitors.

Advice for Next Time

1. When you do this again, make sure you have them put in writing that you are to be reevaluated in 6 months and then in 1 year - performance against goals. This could be in your offer letter. Also have it written that if you meet their expectations, they will increase your salary to a number that meets at least the minimum that the market is paying for your position in your area. They may say no, but you won't know if you don't ask up front.
2. Another option would be to ask for a sign on bonus. This is a lump amount of money that they give you up front. You're salary stays the same, but the sign-on bonus shows that they are serious about you. Usually with a sign-on bonus, you have to agree contractually that if you leave in the first year, you must give the sign-on bonus money back. I have seen $2,500, $5,000 and $10,000 sign-on bonuses before.
3. During your negotiations and they ask you about salary, if you know the market value of your skills is between 45K and 65K, tell them you're looking between 55K and 75K. Never start with the real low number (45K). If you say 55K to 75K, they won't offer you 55K because it's insulting since it's on the low end of what you want. Rather, they will split it in the middle and usually offer you 60K or 65K.

Using 60K as the example, you could negotiate once more and say:

"I was really hoping to be closer to the 75K side. We're talking about a 15K difference I would be willing to split the difference with you which would make my salary 67,500. If that sounds fair to you, I'm ready to start immediately."

If they say no, then you say:

"Ok, then how about I say yes to the 60K with a sign-on bonus of $7,500 and at the end of one year, we can evaluate my performance against goals and discuss any salary adjustments then.

Negotiating is an art. If you give a little, you expect something in return. Then they will give a little and expect something in return. You do it layer by layer, only giving a little each time and always asking for something small in return. The end goal is often still the same (you get the salary you wanted) but it's done nice and slow.

Make sure you're using sites like glassdoor.com and indeed.com/salary to learn about the health of a company, what people have made there in the past, how much attrition they have, any negative feedback about the company, and average salaries for your role where you live.

Answer 2

It is my experience that if they want to underpay you to start, you will remain underpaid for the life of your employment. And not just there either as previous salaries are often factored in to how much you get at later jobs.

If someone promises a raise in 6 months or a year, you had best have that in writing and even then you will often not get it. If they promise verbally, then it is not a real promise. The person may be gone by then, he may not be able to get you a raise at that time or they may not feel you are worth one since you were working for the lower rate. Or there may be a company-wide freeze on pay raises.

Never accept a job where you are not happy with the initial salary based on some promise of more money later.

Answer 3

So, is it common for companies to pay significantly less the first year and give a sizeable raise after you are up to speed and they have seen your value?

I don't know if it's common or not.

I never do that. And I've never worked for a company where that was common practice throughout the company.

I have worked with one peer who made it a regular practice to hire (Software Customer Support Reps) folks for an initial "trial period". This was usually 3 months.

He paid them less than the going rate for that period. The theory was that during the trial period, either party could decide that it wasn't working out, and end the trial on short notice. At the end of the trial, if the manager and employee both decided that it was a good fit, the employee trial ended, and she/he got a raise - usually slightly above what would have otherwise been offered.

My friend felt that this made for better, longer term employees.

As I say, nobody else in the companies where we worked together did this, just him.

Or, is it just a flaw in my negotiation?

There's no way to tell. It might be that you have poor negotiation skills. It might be that the roles you are applying for appear to be a "reach" based on your background and prospective employers want assurance that you will work out. It might be that you keep applying for jobs where you have somewhat less than sufficient domain knowledge. Or it might be industry norm for the domain in which you work.

Answer 4

Many people will try this, and some companies have a policy of doing it. One city I lived in suffered because most of the tech companies had a policy of paying everyone less than the median for that city+job. They also complained a lot about staff leaving, often without notice. When I left that city I got nearly double the pay moving to a smaller, cheaper city. It was actually worth losing two weeks pay instead of notice in that situation. Being 14 months into a 6 month trial period on a reduced wage made "doing the right thing" even less attractive. So yes, some employers will do this to you.

Now that I have more experience and I've been contracting for a while I'm much more willing to do this. I will always put it in the contract (or whatever paperwork they want me to sign for a salaried position), and I will try to get it phrased as a discount rather than a pay rise. Just because the mental model is different "he's worth $100k but we're getting him for $80k" is much better than "we might have to increase his pay in a couple of months".

Most of the time this works well, but it relies a bit on you being willing to walk away. Smart companies realise this, but also know that the cost of training you on their systems is much greater than what they get back via the discount. So they just pay the increase, sometimes without saying anything. "we don't make a song and dance when we fulfil any other part of your contract". IME those are the good companies to work for.

When it goes bad I've found it usually requires pushing the problem up the chain of command. If you're in a small company where you work directly for the owner you're generally stuck. The sort of owner who tries this stuff is not the sort to respect any kind of negotiation, and after months or years in the job you will usually know this. But with larger companies, especially where you dealt with someone other than your immediate manager when being hired, it's normally enough just to explain the problem to someone other than your manager. HR especially are usually aware that it's very cheap for you to go to the small claims court with your contract and pay slip and get a judgement very quickly.

BUT this only works if you have some bargaining power. If you can find another job easily that's all you normally need. Especially because doing job interviews when your reason for leaving your current job is "I work for X. They're not paying me what they agreed to". That makes them look bad, and no-one is going to wonder why you're really leaving.