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The following happened several years ago when working in another company, but same policy is also used where I work.

One of the managers had to fill up one position for some kind of technical support position. He had two options:

  • try to transfer one of our colleagues that worked within another department OR
  • hire a new person

After several interviews, he realized that had to choose between two very similar candidates:

  • the internal one, who also wanted to be transferred.
  • a good candidate

However, the internal policy specified that an existing employee could not transferred and have a salary raise more than x%.

I am wondering why having such a policy that puts a barrier for getting a good candidate for a job. An existing employee can be preferable as he/she is familiar with the company culture and also might be motivated by a change.

I asked a few persons about this policy, but nobody seems to have an explanation about why it is there.

Question: What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

Alexei
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    Before you VTC as Company-specific regulation, note that 1. OP asked around and received no response, 2. policy in question is quite common, therefore not company-specific, 3. question is about the rationale of such policies – rath Sep 14 '18 at 14:03
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    Thoroughly similar, https://workplace.stackexchange.com/q/9359/17532 – MonkeyZeus Sep 14 '18 at 16:16

11 Answers11

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What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

In general, salaries increase over time quicker for new talent versus the standard 3% yearly raise for an existing employee. This is particularly true in IT. This is why you see a 3 to 5 year stay at a particular place of employment when looking at an IT professionals resume or online profile.

Should an employer give raises to current employees to keep them in line with what the market will bear? Probably, but the company is betting that an employee will get too comfortable in their environment rather than seeking employment elsewhere to close the pay gap.

Further, in medium and large companies in particular, raises are approved by someone way higher up the food chain than an employee's direct manager. Meaning, even if the manager knows an employee needs X percentage of a raise to stay with the market, HR or upper management may not approve.

Sadly, in some fields like IT, you have to change jobs or get a promotion in order to keep with what the market will bear.

Neo
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    attracting a new employee for a high level job needs more incentive then promoting from within. Most people don't go on the job hunt if they can avoid it. – Kilisi Sep 14 '18 at 14:20
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    Yeah, but someone internal is probably more valuable to the company. – David Thornley Sep 14 '18 at 14:45
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    @DavidThornley it's a tradeoff, promoting internally also can impact on morale and other things, it's not as clear cut as one might think. – Kilisi Sep 14 '18 at 14:52
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    @DavidThornley promoting exclusively from within creates hole that need filled, so the department losing the employee to promotion goes looking for another internal employee to steal from yet a different department to file its open seat. It just creates a long line of reshuffling. – psubsee2003 Sep 14 '18 at 17:52
  • @psubsee2003 I wouldn't say "just." The lower level position is probably easier to hire for, as it requires less expertise in the company's business to do well. But yes, there is a trade off. – jpmc26 Sep 14 '18 at 18:17
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    Another trade-off to consider is that not promoting within the company makes jobs "dead end". I think too many managers (including upper management) forget this. – computercarguy Sep 14 '18 at 18:21
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    @computercarguy Certainly. The last team I left was haemorrhaging engineers because there weren't enough internal promotions. – mbrig Sep 14 '18 at 19:59
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    Come to think of it, in my 7,5 years in the IT field, I have only seen two promotions to my colleagues. Intermediate to Senior. And Senior to Team Lead. Colleagues changing jobs for raises - probably 20-25 times. – Juha Untinen Sep 15 '18 at 07:18
  • A company I worked for was unable to hire new IT talent because old talent was not leaving the company fast enough. The average tenure at the time was over 15 years. Not everyone wants to be promoted out of coding and engineering. – pojo-guy Sep 15 '18 at 17:14
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    @pojo-guy The reason can't be that. If the existing hires are a good team, why do you need new talent? If you can't handle the workload, why not increase headcount? Not having people quit doesn't mean you can't hire new people... you can just hire a new guy when you budget for it. – Nelson Sep 15 '18 at 18:40
  • @Nelson New talent was needed for modernization - shifting from 1980's COBOL on zSeries mainframes to microservices architectures. Have you ever tried explaining Object Oriented to a COBOL programmer who's never done anything else? – pojo-guy Sep 15 '18 at 19:07
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    @pojo-guy The problem with explaining OO is that it's usually talked about in pie-in-the-sky nonsense terms. Try this: 1. Objects can be used to group data into custom data types consisting of many different variables; the data variables can even be of another custom type. 2. It occasionally makes sense to attach a little extra functionality to a data structure. 3. Objects double as containers for functions, allowing you to swap out real implementations for fakes during testing. Or something along those lines. OO is confusing because the mindset isn't grounded in practical code writing. – jpmc26 Sep 15 '18 at 19:51
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    @pojo-guy What you need is a real expert in BOTH languages, and one with enough seniority to tell management what is feasible to modernise and what not to. A new hire that will do the migration successfully will easily eat up 1.5 headcount of salary, then you'll have massive manpower shortage because you just lost 3 headcount of salary for daily operations... Just think about this problem for a bit... You can't do this by waiting for existing staff to quit. – Nelson Sep 16 '18 at 02:56
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    When asking for a raise to my former boss, he said "it is normal for you to be paid 15% lower than market-value, because you will get these 15% when starting in a new company". 3 months later I was out. – le_daim Sep 17 '18 at 06:56
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    @Nelson 'What you need is a real expert in BOTH languages, and one with enough seniority to tell management what is feasible to modernize and what not to.' So basically a unicorn? I'm sure they exist, but the chances of finding one before they no longer do are slim at best, and if you do you're going to pay a lot more than 1,5 headcount of salary. – Douwe Sep 17 '18 at 08:27
  • @Douwe well I gave them the benefit of the doubt and assumed they pay way above market. If they pay anywhere near market, yeah, this one guy will eat up 5 to 10 headcount of salary. – Nelson Sep 17 '18 at 13:04
  • @Nelson fortunately, I no longer work for that company so it's not my problem any more. They did have an expert in both languages (not me), and they ignored him. Also, the absorption of OO concepts over the years had led to a COBOL coding style that was elegant, reliable, and easy to read, but didn't make sense to olde schoole COBOL programmers, who still insist on coding all in upper case and to a compiler bug that was in the distribution for six months in the 1960's. – pojo-guy Sep 20 '18 at 19:22
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    @psubsee2003, the advantages of this is that everything can be scheduled, the transferred employees are available for transition assistance, and are familiar with the company. /n if internal promotions and transfers are blocked, then people will leave, with only two weeks notice, and will be far less available for transition assistance. – Barry DeCicco Dec 06 '21 at 12:53
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Obviously I can't speak to the motivation of an individual company but there's a couple of common rationales for this sort of policy:

  • transferring an internal candidate brings the additional "negative" to the company of the fact that they have to then recruit to replace the transferred employee, so instead of having one employee learning a new role you have two.

  • a candidate moving from another company is taking a greater risk than one doing an internal transfer and thus you need to make it more attractive - and a bump in salary is probably the most likely way to do this. In a way this is similar to what you see with things like mobile phone contracts - it's more difficult to attract a new customer then it is to retain an existing one, which is why new customers are the one's who get all the discounts and special offers thrown at them.

motosubatsu
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    Barring the transfer to bring someone else in doesn't eliminate the possibility you'll have two employees learning new roles. Instead, it may mean you have to recruit for two roles rather than just one because the employee leaves rather than stay in the position from which they requested a transfer. – Dan Lyons Sep 14 '18 at 17:38
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    @motosubatsu on your second point, that includes forgoing bonuses and unvested 401(k) matches/stock options, and similar benefits... – 0xFEE1DEAD Sep 14 '18 at 17:53
  • If this was the case surely the policy would not be that internal candidates couldn't get a raise of more than x% but that internal candidates offers will always be x% lower than external candidates. As it stands if the position is offering Y money and the candidate is already on Y money then they can be offered the job for that amount. Its only if the internal candidate is on significantly(?) lower that this policy takes effect. – Chris Sep 16 '18 at 21:29
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Mostly I think it's supply and demand.

Looking for another job is a lot of work. And it involves risk: the new job may turn out to suck for any number of reasons. You may have to move to another city, which is a lot of effort, can mean leaving friends, and requires you to learn a whole new community. So for most people, if you offered them a new job that pays the same as their current job, they'd stay at their current job. You need to pay them more to get them to change. Companies know this and act accordingly.

In my humble opinion, many companies have over-learned this lesson and hurt themselves. I've worked at a number of companies where management has rules that no employee can get a raise of more than x% per year, they regularly hire new people for more than they're paying current people with equal qualifications ... and then they grumble about how many people quit and how there's so little loyalty to the company. Well duh, you punish people for staying and reward them for leaving, and then you are baffled why people leave.

I worked for one company that had a policy that if an employee quit and was later re-hired, their salary when they were rehired could not be more than it was when they left. I suppose they came up with this rule to get around the potential loophole of someone who couldn't get a decent raise quitting and then demanding a bigger raise to come back. But of course the result was that employees who quit would almost never come back. If someone quit and went to another company for a nice raise, and then after 2 or 3 years decided he didn't like the new job, they were saying that he would have to go back to what he was paid 3 years ago, he'd have to give up 3 years of even cost of living increases. The only people willing to do that would likely be people who couldn't find a job anywhere else, i.e. the least qualified people.

Jay
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    In short, the balance of bargaining power lies with the employer of a pre-existing employee, which is fully exploited both in hiring and raises. – HonoredMule Sep 14 '18 at 20:36
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    An existing employer could be said to have an advantage in bargaining power over a potential new employer, yes. The existing employer can offer simplicity, continuity and stability that the potential employer cannot. The potential employer usually makes up for this by offering more money. An existing employer does not have an advantage in hiring by definition, because if they're an existing employer you've already been hired. – Jay Sep 15 '18 at 05:40
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    The employer has a hire that's already worked out and been integrated into the company and costs less. The employee has a position that's already worked out and settled into but gets paid less. That is definitely an advantage, which exists because a person's job is a much bigger part of their life than the company's employee is of its bottom line. And the bigger the company, the larger the disparity in comparative risk. – HonoredMule Sep 15 '18 at 06:13
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There are companies that specifically address this problem, such as Netflix. They intentionally recalibrate salaries every year to the "top of your personal market", then pay people that maximum. So, you would get a bump every year to keep you incentivized to stay with Netflix instead of moving around.

That said, another (more likely) reason for this sort of policy is to prevent fraud. If my friend was the manager of the other team, he could hire me at a 50% pay raise and then I'd give him half of that bump. Remember - most policies aren't built from greed (the laziness theory) - they're built to stop something bad that just happened when the policy was written. If you could go back in the company's history, you'd probably discover an event similar to what I described.

Rob Kinyon
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    Your friend could also hire you when you were not in the company yet, right? – Paŭlo Ebermann Sep 14 '18 at 21:34
  • How's Netflix' policy working out for them? Seems easy to pay as much as you want in salaries if you can just keep borrowing, so maybe it's not a great company to compare with. – pipe Sep 16 '18 at 14:05
  • @pipe Well, according to the Netflix careers page “Note that if our company experienced financial difficulty, we wouldn’t ask our employees to accept less pay.“ – nick012000 Jan 31 '20 at 00:14
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Question: What is the rationale of not offering an existing employee a salary as large as the one offered to a new one?

Answer: Probability that a new employee will be willing to accept that offer is way lower than the probability that the existing employee will accept it. This comes from inheriting risk of changing jobs (I worked here for 5 years, no one fired me, no one gave me a hard time, everything is smooth and predictable. I should get some more reward to take a risk somewhere), reluctance to change anything (switching the job will require me to speak to people, take interviews, so I would rather sit where I am now)

Salvador Dali
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Be careful not to mix up two different things here. This policy has nothing to do with whether an internal transfer can be offered the same salary as an external hire, even if it might have that side effect from time to time. Policies like this are designed to prevent employees from gaming the system to artificially1 increase their salary and bypass normal pay-raise mechanisms.

Here's an example. When the 2008 recession hit, a company I used to work for halted all pay raises for a couple of years in order to avoid layoffs. We had quite a few employees figure out that they could leave the company and our cross-town rival would hire them for about 7% above what they were making before. Because of the recession, it would be a year or so before their team could get clearance to hire a replacement. Once they saw a job posting for their old position, they would apply and get re-hired (since they were the perfect replacement for themselves) - again at a salary about 7% above what they were making. In a little more than a year, they would end up in the same job they started in, but with a salary almost 15% higher than where they started.

When my company saw that this "technique" was being exploited by dozens of people for the sole purpose of bypassing the company's pay-raise system, they instituted a new policy: When re-hiring a former employee who has been away from the company for less than X amount of time, you can offer them no more than Y% above what they were making when they left. This made the game a lot more trouble than it was worth, and the practice soon halted.

The OP's case deals with internal transfers and not re-hires, but it's really the same game. The pay raises are typically smaller for internal transfers than for poaching a competitor's employee, but you can still exploit that system in the same way to job-hop and inflate your salary. Since you're staying within the same company, it looks less fishy on your resume as well.

Always remember, though, that rules like this are designed to discourage people from trying to game the system. They're not set in stone. If there's an internal candidate that would be perfect for your team and there's a justifiable reason to pay them that much, hiring managers can typically escalate the issue to HR or a VP and get an exception made. They might add a precautionary clause or two to their contract, but having management vouch for you can go a long way.

1 I use the term "artificial" here because the pay raises did not go through the normal raise process and were not based on merit. Employees were essentially engaging in price-gouging to inflate their own salary. They would repeatedly emphasize that the short-term cost of finding another replacement and training them to the same level of proficiency would cost more than that 15% differential. The company was very focused on short-term finances due to the economic situation, so the company would suck it up and re-hire them at the inflated salary, even when it was well above market rates. In the long term, that employee would cost the company considerably more than a comparable employee. Pay couldn't be reduced if the employee was performing adequately, and "because you're overpaid" wasn't considered a valid reason for firing somebody. Instead, these artificially-inflated salaries remained, reducing the funds available to use for giving everyone else raises.

bta
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    although you have to admin that the first rule: no 7% raises anymore (not even for employees threatening to leave), started the whole gaming systems. all the other rules on top of that sound just part of that. But i guess its necessary in a big company. – Joel Harkes Sep 16 '18 at 19:50
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    In your example, the employee can't get 15% more from the same company, but they can get 7% more from the other company. How many employees did you lose? – user253751 Sep 17 '18 at 03:13
  • Doesn't seem that much related to the OP's case? – AnoE Sep 17 '18 at 08:44
  • "Policies like this are designed to prevent employees from gaming the system to artificially increase their salary and bypass normal pay-raise mechanisms." - And then you go on to explain that a policy like this can cause people to game the system, and at no point do you explain why this increase in salary is "artificial". -1 – AndyT Sep 17 '18 at 13:41
  • @AndyT I believe you misread. Employees were gaming the system until this sort of policy was put in place. – bta Sep 17 '18 at 23:54
  • @immibis- They would gain ~7% for transferring out and then another ~7% when they transferred back, so x * 1.07 * 1.07 = 1.145x. The only figures I have are that this had been done "dozens" of times. Some long-time employees claim to have done this several times over the years, but the bulk of it was done within a ~2 year period. – bta Sep 18 '18 at 00:29
  • @bta - No, I didn't misread. If you can get a fair payrise at your current job, you have no need to change companies in order to get a fair payrise. Policies of "no (or limited) payrises for existing employees" cause employees to game the system. Your answer here just talks about an addendum needed once the policy is shown to be ineffective, it doesn't explain why the policy is needed in the first place. – AndyT Sep 18 '18 at 08:01
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    If the employees were still the perfect replacements for themselves even with a 15% pay increase, that just suggests they were being massively underpaid to begin with. Otherwise, even with the perfect skillset, surely they'd just price themselves out of the market. – delinear Sep 18 '18 at 08:01
  • PS Thank you for explaining why you think the payrises were "artificial". I was about to explain why your "artificial" is still incorrect, but @delinear has done it for me. – AndyT Sep 18 '18 at 08:02
  • @delinear - That's the rub. They're not actually worth re-hiring at +15% under normal circumstances. It only appears that way when budgets are tight, financials are focused purely on the short term, and the project is at risk because they're down a man. It's either that or the project fails and lots of people lose their jobs. Under normal circumstances they'd never get that much. They've created an emergency, got themselves hired at a premium to resolve the emergency, and then enjoy that premium long-term. Essentially, they're acting like politicians. – bta Sep 19 '18 at 18:23
  • @AndyT - I see, I misunderstood which policy you were referring to. None of these policies make much sense logically, but then again we are talking about HR policies here. Regardless of whether they're good policies, though, this is the sort of thought process that HR goes through that leads to these sorts of caps on pay raises. – bta Sep 19 '18 at 18:27
  • @bta 'game the system'? 'Price gouging'? – Barry DeCicco Dec 06 '21 at 13:00
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The rationale for this is imaginary. Over time this company will retain complacent mediocrity or worse. All the new hires that are ambitious and attractive to the market will rotate out. Which I guess is fine if you are a government entity but not the case for a privately held one.

Stian
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  • Do you have proof/statistics to support that? – AnoE Sep 17 '18 at 06:43
  • @anoe Not too much wrapped up in a nice package for you to read, but there are studies that (not surprisingly) showing a low wage consistently being among the top 3 most important for job satisfaction and morale. There are other studies that show that people who aim for developing a career select/get higher salaried jobs on average. Then there is the socio-economic rationality in realizing that there is in fact a functioning market for work, and if you consistently buy the cheapest you get the worst. – Stian Sep 17 '18 at 10:21
  • But we have no indication that the person in OPs post had a low wage... it's about getting a raise for switching internal position. – AnoE Sep 17 '18 at 12:28
  • @Anoe I thought that was implicit in the question. Why not pay the same rate (i.e: as high rate) to internal hire as external. My tongue-in-cheek answer is that this is silly and will have consequences. You are deliberately causing the ambitious people to not chose promotions, but go outside the company. Best case scenario is only inflating the cost of onboarding across the company - but that assumes that you are able to hire as productive people as those who left. Which is a non-trivial task, certainly less trivial than setting non-perverse promotion policies... – Stian Sep 17 '18 at 13:17
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It's just to safe money. If you are in your job, most people just stay there and take what they are given, so this policy saves the company money. Employees don't compare to salaries elsewhere, and if they do and complain, they are seen as not "loyal" and their days in the company are often numbered.

The same employee looking for a new job usually knows that the best time to increase the money is when you start a new job. They often have two or three offers and therefore can demand more money and obviously pick whoever pays most.

So people who are already employed will most of the time stay even with little increases, while the company has to pay more when they hire someone new, or they won't get anyone.

Now while this practice seems to save a bit of money, it is doubly inefficient, because the company will lose its best employees every two or three years, who then start elsewhere with more money, stay for two or three years and repeat, and the employees are mostly not happy having to change jobs, but they have to to get a decent raise.

gnasher729
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Many companies have policies on the percentage of increase when transferring employees, i.e., is this a lateral transfer, a promotion, is this a transfer to a revenue generating position, is this a lateral move with additional responsibilities; and the increase amount/percentage, would be aligned to the type of move. A transfer that is considered a promotion would have the largest increase percentage potential of all transfer types, specifically those transferring from an Individual Contributor role to Manager of people, etc. The percentages, however, typically are not enough to bring the current salary to someone they bring in new. In my experience, exceptions can be made with formal justification to as to why the internal transfer should have a compensation that is consistent with market standard. Institutional knowledge is invaluable in many cases and worth retaining in a stellar employee.

There are so many benefits from making the transfer fair and equitable if the internal candidate is the right fit. It demonstrates the company is invested in their employees, shows their peers there is a career path and retains that knowledge.

In short, these policies are in fact complex, real and can create animosity for employees who are getting the standard annual increase while the company is hiring people making far more than them. This does lead to job jumping indeed as mentioned in the original question. I have however also witnessed many "Job saves" where a critical resource is a flight risk or has received another offer, the leadership, compensation can and have proposed increases to match the market salary that they are being offered, regardless of the percentage. This is not good practice, as an employee should not have to resign to get market compensation, but it does happen.

DarkCygnus
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Lisa
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Rationale assumes a strategic decision made deliberately

We think of companies as careful, methodical, and calculating. They aren’t. I’m in a meeting currently where we are being asked to provide a deadline for project completion. this follows a meeting where we spent two hours estimating poorly defined tasks for the sprint.

What is the definition of deadline? We don’t know. Does it mean done development? Done testing? Deployed to clients? Not specified.

So an hour is going to be spent mucking around to create a number which will not be terribly useful. Especially since the estimate is dependent on the number of developers available.

This isn’t meant as employer bashing. It is just a reality that organizing a large group of people is fraught with communications problems and loss of strategic goals. I’m sure the boss who wants the estimate has an idea in mind of what he wants, but in the room of the 8 people making that timeline, that knowledge didn’t arrive.

So I don’t know if there is a rationale behind it at many companies. I can see many companies just never getting around to looking at it that way or even if they do, never creating a customized way to combat it.

Matthew Gaiser
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To me, it would seem logical to have a set maximum for salary increases between positions (at least before requiring serious approval / justification and review), because with that, you can manage employee's expectations of what they'll get with that promotion.

For example, if the employee thinks he's going to get $30k more per year as a raise, and you don't want to pay him that much more for example, you've got a TERRIBLE situation on your hands - You've just set up an existing employee for a situation where they'll consider leaving for more money, if you tell them you can't/won't pay them a certain salary, where they might otherwise have thought "Well the max I can get this raise for is 10%.... I can't get 30k. If I apply, I'm okay with just 10% for now."

This way, expectations are managed. If the employee transfers, they have a strong idea of what they'll get, the company saves themselves the hassle of having to risk a new hire from an outside source for that specific job, etc.

If the max % raise is too low, then it's just a silly notion in the first place. Upon hearing such a thing, I'd consider it a red flag about employee turnover at that company in their future

schizoid04
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