One of the most frustrating elements of recruiting occurs when after weeks of hard work, you have found an excellent candidate who is excited but you can’t get past the last sticking point: the appropriate starting salary. The candidate naturally wants more, but the company is often reluctant to offer more money because they are uncertain whether the new hire will produce at a level high enough to justify their higher salary request. Rather than losing the candidate, consider offering them a “salary reopener clause.”
The salary reopener gives the new hire a chance to get that added money within a short period of time, provided that their actual performance for the first few months has been worthy of the higher salary. No candidate wants to wait, but if they are confident in their ability, they may be willing to wait a short few months to show you that you are wrong. All you are really doing with the reopener clause is postponing the final salary determination until the new hire has a chance to prove their worth. Salary reopener clauses are quite common in union contracts but they are unfortunately underused by recruiters.
A Hiring Manager’s Uncertainty About Future Performance May Lead to a Low Offer
A lack of confidence almost always reduces a manager’s willingness to invest. From a company’s perspective, it only makes sense to be a little skeptical about a new hire’s future performance because in some cases, nearly 60% of new hires are not optimal. Almost every manager can the recount numerous stories of under-performing new hires who disappointed them.
A high level of uncertainty and a lack of willingness to invest in a higher salary can occur for a variety of reasons. Many are outlined below. The finalist …
- Might not have held this exact job before, so they may completely fail.
- May under-perform for their entire first year, so there will be “salary waste” for numerous months, at least until they are not given a raise at the end of their first year.
- May have exaggerated their skills or experience in the resume and during the interview.
- May be slow to adapt/learn, so their work will be below their salary level.
- May not fit the culture of the team or company.
- May not operate well under this supervisor’s management style.
- May dislike the job and under-perform over the long-term or even quit.
So in the end, if the hiring manager, the recruiter, or the compensation analyst lacks confidence, it is only natural for them to offer a lower starting salary that matches their lack of confidence. And unfortunately, if they can’t make a convincing argument, they will likely lose any candidate who can stay at their current job or who has other likely offers available to them.
Hiring Managers Also Fear “Salary Waste”
In addition to worrying about new hire under-performance and failure, managers also fear “over paying” a new hire. This overpaying results when you pay a new hire an average- or above-average performer’s salary but the new hire actually performs at a below-average level. That overpayment is known as “salary waste.”
A Salary Reopener Clause Is an Effective Solution When There Is a Starting Salary Impasse
When both sides agree that there is no way to actually prove the candidate’s value before they start work, an approach I have used successfully is a “salary reopener clause.”
This approach actually tries to take advantage of the candidate’s confidence in themselves and their future performance by offering them a “salary reopener clause” after a few months on the job. Just like star athletes moving up to the next level, the best candidates are confident that they will be a top performer. So under the salary reopener method, you take advantage of that confidence by showing that after a short period of proving themselves (usually three or six months) that their salary will be renegotiated upward. After asking the candidate to “prove themselves first,” you will find that many will accept the “challenge.”
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Key Action Steps for Using Salary Reopeners
There is no standardized process to follow for new hire reopener clauses. However, here are some important things to consider when implementing this option. They include:
- Try these options first — if you can’t match the salary dollars that the finalist expects, the first obvious option is to try to explain the reasons (as cited above) why you are reluctant to make the higher offer to any new hire (be careful of making it personal). A second option could be to offer them the higher salary to start and then later reduce their pay proportionately when they fail to produce. Unfortunately in most cases, cutting someone salary is not very realistic in today’s world. A third option is to simply give them a pay-for-performance offer, which ties their pay directly to their output.
- Don’t offer it all the time — there is no law limiting the number of times you can give salary increases, but obviously having numerous salary re-openers during the year can be time-consuming both for managers and for compensation professionals. As a result, these reopener clauses should be offered selectively. That generally means only for key jobs, for highly desirable candidates, and in all cases, it should not be included in any more than 10% of new hires.
- The time delay before reopening — the time delay before the reopener can vary between two and six months. That time usually is based on past experience covering the earliest time that a new hire could possibly prove their performance level. A period of longer than six months would in most cases not be a motivator. In some cases, the date is set by the time that the new hire reaches predetermined output levels.
- You simply agree to renegotiate — most reopener clauses provide no guarantee of a salary increase; the promise will simply be to renegotiate their salary on an agreed-upon date based on their on-the-job performance.
- The amount — when it comes to the minimum amount expected, obviously the candidate will be interested in obtaining their original salary request. As a result, the possibility of achieving that original level must be in the clause. A better motivator would be to include the option of raising their salary even further beyond their initial expectation level. Rather than using gut feelings, the amount of the raise should be based on the new hire’s performance data. For example: the raise will equal the same percentage that their performance exceeds the average performance level of new hires. It should not however be based on updated salary surveys (which would set a bad precedent).
- Written or verbal clause — some candidates are willing to accept a handshake agreement to renegotiate later and some companies are reluctant to put such an opportunity in writing as part of the offer letter. I recommend the written option, so that expectations are clear and preset.
- A bonus option — if a manager is still unsure of the new hire’s actual value during the re-opener negotiations, plan B is to offer them a smaller salary increase, coupled with a one-time performance bonus. If the uncertainty level is very high, offering them only a bonus might in a few cases satisfy them until the end of their first year.
- Learn from experience — if over time the data shows that you are frequently bumping up salaries significantly during these re-opener sessions, reassess your recruiting and compensation schemes so that they better fit the current reality. Track the number and percentage of offer rejections that were “turned around” after the reopener clause was offered.
- If offer levels are fixed — in tight economic times, executives in cash-strapped companies all too frequently prohibit the offering of any new hire a starting salary above the minimum or first quartile. In those cases, the reopener cause may help you “get around” that prohibition and increase your offer acceptance rates, provided that the compensation department approves.
- Stay aware of the negative consequences — remember if the new hire doesn’t get the salary that they believe their performance deserves during the renegotiations, you must plan for the likelihood that they will quit, reduce their performance, or at the very least, develop a bad attitude. Other employees may react negatively to these reopeners because they may feel that they are also underpaid but they do not have the reopener option. And it is certainly not wise to open the salary reopener option to all current employees.
Why It Is a Major Mistake to Underpay a New Hire
Many executives mistakenly think that underpaying is a good thing because obviously it saves the company money in salary dollars. But hiring managers need to realize upfront that there are some major negative performance consequences associated with underpaying the new hire. Those negative consequences can include:
- Rejected because of a fear of being “locked in” — frustrated candidates may reject offers because of their basic fear that whatever initial salary they accept, they are essentially “locked in” to that salary for an entire year (until their first annual performance appraisal). This “locked-in feeling” can have some major negative consequences. They include:
- Rejected because they feel undervalued — to a highly confident individual, simply the thought of feeling undervalued for an entire year will increase offer rejection rates.
- Reduced performance — and even if the new hire accepts the lower pay level, that feeling of being underpaid and underappreciated might actually cause them to reduce their performance to meet their actual pay level for a significant part of their first year.
- Early turnover — if the frustration gets too strong, they may actually quit rather than waiting for the remainder of the year to be shown that the firm understands their value.
A salary reopener is a powerful tool that I have found to overcome a situation where the applicant thinks that their value is higher than the company assesses it to be. The company gets to delay putting “all the money” as guaranteed on the first day.
Candidates can accept the reopener clause because they are confident in their ability and they may only have to wait as little as three months to get the salary that they feel they deserve. People who are desperate for every penny might not be willing to wait, but top performers are not generally afraid of a “show-me-first” deal, as long as it is of a short duration. The salary reopener clause is not a solution for every case, but it works amazingly well when both sides come around to seeing it as a win/win option!