Have you ever had a prospective hire ask for more money or an existing employee express that he or she is underpaid? Despite your best efforts to develop competitive pay structures, there may be times when employees try to negotiate their pay. Here are some helpful hints for preparing for and handling these types of situations:

#1: Understand applicable laws.

There a number of laws governing pay, some of which may impact how you handle salary negotiations and/or develop your compensation program, including:

• Minimum wage and overtime: Federal law, and some state and local laws, require employers to pay non-exempt employees at least the minimum wage per hour and overtime for hours worked over a certain amount per week and/or per day.
• Nondiscrimination: Federal law and many state and local laws prohibit discrimination in pay (and other employment practices) based on race, sex, age or other protected characteristics. Audit your pay practices regularly to ensure they are equitable and any disparities in pay are justified and lawful.
• Pay history: Under the assumption that it could perpetuate pay discrimination from a previous employer, some jurisdictions prohibit employers from asking about or using an applicant's pay history to make pay decisions.
• Pay discussions: Federal law and some state laws give employees the right to discuss their pay with co-workers. Avoid rules or other actions that could be perceived to restrict this right.

#2: Have a compensation philosophy.

Your compensation philosophy should aim to attract, motivate and retain talent, while keeping labor costs under control. Job offers should highlight total compensation, addressing both direct compensation (wages, salaries, commissions, and bonuses) and indirect compensation (health insurance, paid time off, retirement plans). For example, your company might emphasize competitive base salaries with benefits that help employees maintain a healthy work-life balance.

#3: Know the market.

Know what your competitors pay employees in similar positions. Review external salary data from the federal Bureau of Labor Statistics or industry groups and third party vendors. Having an accurate picture of the market can help you establish competitive pay rates and respond to employees who contend that they are underpaid.

#4: Define your criteria.

Establishing salary ranges for a job or a classification of jobs can help provide structure for job offers and pay increases. Within this range, salary determinations should take into account the candidate's education, skills, and job-related experience. It should also account for external equity (when compared with employees at other companies) and internal equity (when compared with other employees in your company), and factor in the job duties and the level of expertise required for the job.

#5: To negotiate or not?

Some employers are willing to negotiate salaries, while others only negotiate in limited situations (such as hard-to-fill positions). Keep in mind that the practice of salary negotiations may lead to potential inequities. For example, high performers who have been with the company for several years may be paid less than new hires who negotiated higher salaries. If you do negotiate, make sure your process is fair and develop guidelines (such as, negotiating within the salary range by as much as 10 percent for certain job-related factors). Further, have decisions reviewed by more than one individual to ensure internal equity and alignment with your compensation philosophy.

#6: Consider other options.

If you will not negotiate or simply cannot meet the pay sought by the applicant or employee, you have other options. Emphasize some of the perks of working for you. While this will vary from company to company, things like flexible work schedules, on-the-job training, and a generous paid time off program may encourage candidates to accept your offer. Retention bonuses are another option. These are payments made to employees who reach specific service milestones and can be used as an incentive to keep key employees on the job.

#7: Be open about pay practices.

Communicate your compensation philosophy and let employees know how their pay is determined. Encourage employees to ask questions about your company's compensation plan. However, if an employee complains that a co-worker is getting paid more, let them know that while you cannot discuss another employee's pay, you can talk about how the company determines pay rates and the various ways employees can earn higher pay (such as merit-based increases, job-specific licenses/certifications, or by acquiring new skills).

Conclusion:

It's fairly common for candidates/employees to try to negotiate higher pay. If you are willing to meet these requests, follow established guidelines and document all pay adjustments. Additionally, track the acceptance rate of job offers and how frequently you're called upon to negotiate. This can help you spot problems quickly and adjust your compensation philosophy if necessary.