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Real Reasons For Asking Pay History

handshake with a person in a suit and a person with painted nails
photo courtesy Flazingo Photos

We have hired four full-time staffers at my company since March, and in each case I asked the applicant to provide their salary history as part of the application process. In fact, I have asked for salary history since I began hiring employees more than two decades ago.

But if I did the same six months from now in New York City, I would be breaking the law – and subject to a city-imposed fine of up to $250,000. Such inquiries are already illegal in Massachusetts and in the city of Philadelphia, although the latter’s ordinance is suspended, pending a legal challenge, as I write this post. Similar legislation is making its way through the Legislature in California, and 25 other states are reportedly considering similar measures.

Our company doesn’t operate in any location that has enacted one of these measures so far. But that offers only small comfort in the face of these well-intentioned but ill-conceived efforts to combat the gender “pay gap,” which has taken on many of the characteristics of urban legend: The harder you look for it, the less you find.

The theory behind these laws is that pay discrimination is self-perpetuating. One employer pays a woman less than a man for the same work; the woman applies for her next job and discloses the lower pay, and is then paid less accordingly, while the man benefits from his pecuniary head start for the rest of his working life.

In case anyone is interested in the experience, motivations and decision-making process of one real-world employer, read on.

We are a small company – currently 28 people spread across six states – and we don’t have a lot of formal hierarchy. Our financial advisers are hired for an entry-level position called client service associate. Our administrative staff are hired as administrative associates – a single title that covers everything from receptionists, accounting and technology staff to those specializing in editorial work and graphics. After a few years, individuals on either the client service or the administrative track can become managers.

Each position has an entry-level salary, and each position has a range; typically an employee climbs through the range as he or she gains skill and experience and is then promoted to manager, which also has a range. I have only hired someone directly as a manager once, and that was 17 years ago. I prefer to develop and evaluate people internally.

Since making my first hire in 1995, I have never looked at someone’s salary history and chosen to offer them less than I was otherwise planning to spend. That would be pointless. I want to pay what a job is worth, and then pay the employee for the skills she or he brings to the job. I view this compensation as their money, not mine – and the only way to get good employees to stay is to give them what they are due.

So why do I ask for salary history, and why do I think more people (particularly but not exclusively women) will suffer than benefit if such inquiries are banned?

There are two reasons. One is that an individual’s salary history sometimes gives insight into the level of competence she developed and responsibility she held at a prior employer, as well as the potential sacrifice she is making to take advantage of other aspects of our employment package, such as the ability to work from home. I never want to pay someone more than she is worth, because that creates undue pressure on the employee to quickly perform to a higher level of expectations, and on me to expect that quick improvement. But if someone is making a big financial sacrifice to work here, I will re-think my entry level offer and ask myself whether it might be justified to pay that employee more than the standard minimum. At the very least, I will review the employee’s compensation more quickly than usual once she comes aboard to see if a raise is justified. In recent years I have paid more than the standard opening salary twice, and reviewed an individual’s compensation early on two other occasions. In all cases, women were the ones who got the extra pay.

The other reason is that, as a small firm, employee turnover can be especially costly and burdensome for us. We do everything we can to minimize it once we get past the initial trial period. But applicants will sometimes put on their game face and take less money than they really want or believe they deserve; this is especially apt to happen, in my view, if the applicant has a lifestyle geared toward a previous, higher salary. People make these economic compromises especially often when the job market is weak. I don’t want to hire someone at much less than they were previously making because, all else equal, such an employee is more likely to jump ship for short-term financial gain at the earliest opportunity. This would tend to happen for us if someone is changing careers (as I did when I went from journalism into finance many years ago), rather than coming straight out of school. Salary history makes it more likely I will consider a career changer for an entry-level job when I otherwise might be reluctant to do so.

Before reflexively deciding that banning salary inquiries is a good way to close the alleged gender gap – which often disappears when you consider factors such as employee preferences to work reduced schedules, more flexible hours or from home – it would be a good idea to ask exactly how the gap would be closed.

By raising pay for everyone, or everyone at the entry level? Highly unlikely. Businesses have to allocate resources. Paying someone more means paying everyone else less.

No, the answer would in most cases be to not give a positive differential to someone with a history of earning more, regardless of the individual’s merits. If you are a woman sharing household expenses with a man who is experienced, successful and relatively high-earning in his field, you should give this some thought – exactly as you should if you are man sharing expenses with a similarly experienced, successful and high-earning woman. To the extent banning salary history means people will take jobs at lower pay than they otherwise might get, everyone loses. Employees will get less than they deserve, and businesses will suffer higher turnover than they should.

The law already bans pay discrimination based on gender. Societal changes, an evolving and limited labor force and simple business logic have turned the problem into more of an ideological issue than a practical one. As long as men and women tend to make different choices – and they still do, in the aggregate – their career outcomes will reflect those choices. That’s a consequence of freedom, not bias. I’ll stop asking for salary history if the law demands it, but it isn’t going to leave anyone better off in the long run.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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