Like it or not, the “salary history rule” is coming. Starting from 31st October 2017, banks recruiting people in New York City will be prohibited from asking about candidates’ current compensation or their compensation history. Although candidates will still be able to volunteer what they’re paid, actually starting conversations about current or past salaries and bonuses will be off-limits. The change is going to be huge.
Banks are preparing for the new reality. Recruiters say they’ve already received memos alerting them. One bank is suggesting that its recruiters start asking candidates for their pay expectations rather than how much they got last year. The trepidation is palpable. “Last year’s compensation has always been the starting point for any discussion,” says one search consultant. “It’s the anchor. And it won’t be there any more.”
Leathwaite, an executive search firm with offices in London and New York City, says the rule could be far more disruptive than Mayor Bill de Blasio, who signed it into effect in May, intended. De Blasio meant the rule as a tool for reducing the pay discrepancies between men and women in NYC, but it stands to have massive unforeseen consequences for hiring on Wall Street.
This, says Leathwaite, is why…
1. From next month, everything will be based on rigorous role definition and pay benchmarking
With banks unable to ask candidates exactly how much they earn, data on average earnings is going to be all-important. Post-October 31st 2017, Leathwaite says compensation benchmarking firms are going to have a field day. Recruiters will need to use, “stringent functional role definition and even more rigorous benchmarking than previously.”
2. Banks will simply collude about “pay bandings” and candidates will lose pay bargaining power
As average pay bandings become the all-important basis of compensation discussions, Leathwaite says banks will be able to sit around a table and agree a “price” for a role at a certain banding. In this case, candidates will lose power in pay negotiations (although it’s always possible for a candidate to volunteer his/her current pay if it’s above the banding.)
3. People’s pay expectations will differ wildly; the potential for disagreement will be vast
De Blasio’s introducing his rule to benefit women, but Leathwaite points out that women could be just as badly off in the new world. This is because women tend to have lower pay expectations than men anyway. – If banks base pay offers on candidates’ expectations, men will still come out on top.
Equally, all candidates will have different expectations. One might expect a 10% pay hike to change jobs. Another might expect 100%. In the past, historic compensation gave some context, but unless a candidate volunteers his/her historic pay, this won’t be available any more.
4. Recruiters won’t easily be able to make offers that are responsive to hot new areas of talent
What happens when pay rates need to respond quickly to peaks in demand for certain skills. Past benchmarking bandings won’t be sufficient in this situation, says Leathwaite. Equally, what happens in situations where whole new skills are suddenly needed (eg. information security in the past decade) and there’s no historical data to go by?
5. Candidates will get offers based on salary only, unless they want their prior bonuses bought out in which case recruiters will simply reverse engineer their previous pay packages to arrive at an average number anyway
There’s also the issue of buying out past bonuses. In most cases, senior bank employees have years of deferred bonuses which they leave behind at a previous employer when they change jobs. Hiring banks usually buy these out. By reverse- engineering the historic bonus packages, recruiters will be able to work out exactly what a candidate was paid.
While this is good news for banks and recruiters, it’s less good news for anyone who’s had years of tiny bonuses which they’re trying to escape from. Candidates who won’t reveal how much their deferrals are worth risk getting salary-only offers from new employers, says Leathwaite.
6. This will come to the rest of the U.S. too
Lastly, while banks outside New York City might think they’ll simply be able to carry on asking prospective employees how much they earned last year, Leathwaite says the rules are likely migrate. U.S. banks tend to set hiring practices both nationally globally. At the very least the standards are likely to become national. They may even spread to London.