How do companies end up with significant gender pay inequalities, if they don’t intend to discriminate against women? Here’s a simple economic model to show how this can happen:
Let’s assume your organization has two types of equally qualified and valuable potential hires – one has a low aversion to negotiating (let’s call them Type M), while the other (Type W) has a considerably higher aversion. Both will overcome this aversion if the gap between what they are worth (say $100,000) and what they’re offered is large enough. For Type M, let’s assume that the tipping point is $10,000. So Type Ms are likely to accept an offer of $90,000 without trying to negotiate. In contrast, the tipping point is $30,000 for Type W, which means they will accept a $70,000 salary without negotiating. If either type negotiates, they get what they are worth: $100,000.
Given these assumptions, the optimal strategy for the organization is to take advantage of the candidates’ aversion to negotiate, with potential savings of $10,000 for M types and $30,000 for W types. As a result, Type M candidates are offered higher starting salary ($95,000) than the Type W candidates ($80,000). This saves the company, on average, $5,000 per Type M hired and $20,000 per Type W hired, which results in Type Ms being paid $15,000 more than the Type Ws.
But this is just an economic model, right?
This hypothetical difference between types is consistent with the results of a study that found that women were willing to forgo as much as $1353 (for men, it was $666) to avoid the “pain” of negotiating when buying a car. And another study found that people behaved as this model predicts. More than 150 managers were asked to allocate a fixed pool of money for raises among equally skilled employees. When they were told that their employees could not negotiate, they gave male and female employees equal raises. When they were told they might have to explain the raise to workers and negotiate, they gave raises nearly 2.5 times larger to men.
Why the difference? One likely explanation is that the managers expected the men to question their raises and ask for more. So if they gave large enough raises to the men, fewer would be in their offices demanding explanations. Just as our model predicts, men got higher raises than women.
So what should women do?
One solution may be to seek out organizations that suppress salary negotiations. Recall that when no negotiations were allowed, men and women got similar raises. After losing her lawsuit against Kleiner Perkins, Ellen Pao made an executive decision to ban salary negotiations at Reddit where she is interim CEO. She said:
Men negotiate harder than women do and sometimes women get penalized when they do negotiate. So as part of our recruiting process we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation.
This policy is likely to help level the compensation playing field for women at Reddit. But might there be consequences? Let’s think about the no-negotiation policy in isolation. If this policy applies only to the hiring decision, it could indeed backfire for Reddit employees.
Here is how: Remember Saturn – the General Motors car line known for its no-negotiation policy? Saturns became very popular with women—in fact, more than 60% of owners were women. But did this no-haggling policy result in competitively priced cars? A GM executive we spoke to confirmed that, on average, Saturns were more expensive than other GM cars.
How does this translate to the evolution of salaries under Ellen Pao’s new policy? We might expect that Reddit would, indeed, become more attractive to women – and men who don’t like negotiating. But the salaries likely wouldn’t be competitive. The Saturn experience suggests that over time Reddit may end up paying lower salaries, just as Saturn ended up selling more expensive cars.
The answer seems to be: Negotiate! However, women are often perceived as greedy and demanding when trying to negotiate—an attribute rarely ascribed to men. So a smart first step for women is to reframe the conversation from a battle to a problem-solving collaboration, which opens a lot more options. The goal is to find a solution that benefits both you and your potential employer—or at least doesn’t cost them. That’s why it’s important to prepare multiple creative proposals to remove any obstacles an employer might see as standing in the way of giving you the salary you deserve. It is more difficult to perceive someone as greedy and demanding when she is solving your problems.
The second step is for women to raise their expectations. When both men and women have similar expectations about compensation packages, there is no difference in their likelihood to negotiate. Empirical evidence also shows that when women do negotiate, they’re no more or less successful than their male counterparts.
The third step is to negotiate a package, not one issue at a time. Limiting the negotiation to one issue at a time puts you back into that battle mentality. The outcome is tallied into a win or loss column. When you focus on multiple issues at once (some are more important to you, while others are more important to your counterpart), you can balance them to create value and reach a mutually beneficial solution. So rather than keeping score, you should craft a package that reflects the preferences of both parties.
Negotiation is about influencing your counterpart to embrace a solution that makes you better off. In the end, a successful negotiator doesn’t need to rely on goodwill if she can strike a deal that benefits herself and her organization.