Why Companies Ask About Compensation Expectations

Let me tell you about one of my least favorite parts of recruiting. It typically happens on the first call with a candidate: the candidate sounds great, they’re engaged, they communicate well, their experience aligns well with the requirements, I definitely want to introduce them to the hiring manager. Then I bring up one last important question — “What are your compensation expectations?” — and the conversation comes to an abrupt halt. The candidate, who has been so open up until now, says something like:

• I’m not comfortable sharing that information
• I’m looking for the market-rate
• I want to wait until receiving an offer before disclosing that information

…….

I mean, I get it. I’m still uncomfortable answering this question and I’m in HR. But ultimately there is a good way to approach compensation questions and a terrible way to approach them. Not being open with a company about what you want, or need, is the worst possible approach. You’re asking the company to invest a great deal of time and resources in considering you for a role without providing them any insight into what you want (or need) to earn in order to work there. And on your end, you are about to invest at least 4 hours in an interview process with this company, without understanding if they have the budget to pay you.

I hear what you’re thinking: “But if I give the company a number, they’ll low-ball me! I’m going to be cheated out of money they would be willing to pay me! They have all the power!” I understand why this is a knee-jerk reaction. One of the first rules of poker is to never show your hand, and by answering this question you are effectively placing your cards face up on the negotiation table. I’m hoping, however, that by outlining how a company thinks about compensation and offers, this will help convince you that it’s within your best interest to tell the company what you want.

Budget, Compensation Philosophies, and Banding

When I first started a job search, the advice my dad gave me was, “If the company wants you, they’ll pay for you.” While this sounds great in theory and probably worked in the old days (sorry dad), it isn’t the reality for many businesses. Companies have set budgets for headcount and going above budget is poor business practice. Imagine if you budgeted $5,000 for a vacation and then ended up spending $10,000 — this will have a huge impact on your personal finances for the next few months. The same goes for compensation: paying $120,000 when you had planned for $100,000 has an impact a company’s operating plan.

Compensation Philosophy is how the company thinks about compensation as a whole. There are many ways to define comp philosophy, but here are a few examples:

• Pay top dollar for every candidate in order to win talent away from other organizations.
• Pay rates comparable to other companies in the industry, while offering superb perks and healthcare.
• Start new hires low and then reward performance through comp increases.

Once a philosophy is set, the company will try to stick with it when making offers.

In addition to budget and comp philosophy, most companies will have defined compensation bands for given roles and levels of seniority. Bands usually factor in a company’s budget, their comp philosophy, and external market comparators. Each band has a minimum and a maximum number that aligns with a specific title and experience level.

In practice, this might look something like:

• Level 1 | Junior Individual Contributors | 0–2 years of experience | $50,000 — $65,000
• Level 2 | Mid-Level Individual Contributors | 2–4 years of experience | $63,000 — $78,000
• Level 3 | Senior Individual Contributors | 4–6 years of experience | $75,000 — $98,000
• And so forth….

Many companies will go a step further and create bands for separate departments to reflect variance in skill sets, as well as market factors like supply and demand. An Engineering Level 1, for example, will likely have a higher starting comp band than a Marketing Level 1.

One critical thing to account for is that bands can vary dramatically from company to company. A small Series A, B, or C startup will have less cash and budget to work with than a big public company. Put another way, a comp band for a Senior Software Engineer at a startup may pay thousands of dollars less than a public company like Google…and this is even before factoring in things like benefits and equity.

So how does this all apply to you as the candidate?

When a company is considering you for a role they will be factoring in a few things:

• How much total experience you have
• How much relevant experience you have (this may not always be mutually inclusive with the point above)
• How unique your experience and skills are in the market (if you have a rare skill set that is in high demand, a company may be willing to spend more money on you)
• How your unique skills compare to internal talent already at the company
• How much they are willing to spend to buy you out of the market (see two points above)

And some general rules for you to consider:

• The more actual work experience you have, the more likely you are to earn a higher comp band. A lot of companies won’t factor in undergrad, post-grad, or internship time into that experience equation.
• A company will pay more for relevant experience. If you have ten total years of experience but only three of these have been in engineering, you should not expect to earn the same as an engineer with ten years of engineering experience.
• Supply and demand has a tremendous impact on the labor market. If you have a high-demand skill set in a locale where there is low supply (eg: senior growth marketing in New York City)… congratulations, you have a rare skill set that will likely command a higher comp band. If you’re a recent college grad with no experience… I hate to be the bearer of bad news, but there are a lot of you for a company to choose from. Without truly unique skills, you will likely be in a low comp band.
• Glassdoor and salary.com are unreliable indicators of ‘market rate’ since they don’t account for the difference in company size and stage when determining average salaries for a type of job. If you’re struggling to figure out how to value your skill set in the market, chat with an agency recruiter. They have a finger on the pulse on what is considered the norm for your given market.

These examples are meant to help you get a sense of how to match up your own needs with the company’s reality.

Remember, the company is not out to get you!

Hopefully in this post I’ve helped pull back the curtain on how a company determines compensation for a given role and how they evaluate you against their standards.

When a company asks you about compensation expectations in that first or second call, they want to make sure they have enough money to pay you, and that this amount makes sense given the level of skill you have. They want to make sure they can make you an offer that is both exciting and competitive within their given market. And they want to make sure they have enough room to grow your compensation over time as your tenure with the business lengthens.

They’re ultimately looking out for both their best interests as a company and for yours as a candidate. Why waste time interviewing for a role that can’t pay you what you are looking for (or at the very least, what you need to pay rent)?

I’ll close with a caveat saying that some companies actually do take that dreaded low-balling approach. But in a day and age when social media and sites like Glassdoor and Comparably provide a public forum for employees to discuss compensation philosophy; these companies are under mounting pressure to change their ways.