Job-seeker decides on their minimum acceptable rate rmin.
Employee-seeker decides on the maximum acceptable payment rmax.
Both reveal rmin and rmax, either first through hashsums of the numbers (with random text appended) and then the cleartext, or simply at the same time.
If rmax≥rmin, then the rate is rmax+rmin2 (i.e. the mean of the two bids).
If rmax<rmin, then no agreement takes place and both parties fall back to their BATNAs.
rmin and rmax do not need to be positive! It might be that the potential employee likes the project so much that they set rmin to zero or even negative—an exceptionally great idea might be worth paying for. Or rmax might be negative, in that case one party would be selling something.
I’m not aware of anyone proposing this kind of auction for salary negotiation in particular, Claude 3.5 Sonnet states that it’s similar to Vickrey auctions, but in this case there is no second price, and both parties are symmetrical.
(I’m confident this isn’t incentive-compatible. Consider the case where you happen to exactly know the other person’s bid as an example. I do think it is a good baseline mechanism though. Because it isn’t incentive compatible, both parties need to precommit to no further negotiation if rmax<rmin.)
Sounds interesting. The question is, would it be better for companies than the current situation? Because it’s the company who decides the form of the interview, so if the answer is negative, this is not going to happen.
On a hypothetical nerdy planet where things like this happen, we could go further and let both sides specify numbers for various scenarios, for example what would be the salary for working in open space vs having your own office with doors, how much for work from home vs work in office, on-call vs no on-call, etc. Not sure how exactly to evaluate the results, but I think it might be good for the employers to have data such as “having open spaces is $X cheaper than having offices with doors, but our employees hate it so much that we need to pay them $Y higher salaries, so maybe it was not such a good idea” or “remote work makes people 10% less productive, but we could hire 30% more of them for the same budget”.
The question is, would it be better for companies than the current situation? Because it’s the company who decides the form of the interview, so if the answer is negative, this is not going to happen.
Yeah, I don’t think this is going to be adopted very soon. My best guess at how that could happen is if people try it in low-stakes contexts where the parties are ~symmetric in power, and this then spreads through e.g. people who do consulting for small startups, to salaries for high-value employees in small startups, to salaries for high-value employees in general etc.
Another way this could happen is if unions push for it, but I don’t see that happening anytime soon.
This incentivizes people to spend a lot of wasted time gathering information about what the other party is willing to pay. Which I suppose is true anyways, but I’d like to see a spherical cow system where that isn’t the case.
The employee is incentivised to put the r-min rate as close as they can to their prediction of the employer’s r-max, and how far they creep into the margin for error on that prediction is going to be dependent on how much they want/need the job. I don’t think the r-min rate for new hires will change in a predictable way over time, since it’s going to be dependent on both the employee’s prediction of their worth to the employer, and how much they need the job.
For salary negotiation where the employee already has a contract, I would expect employees to set r-min at their current salary or a little above. This prediction is fully dependent on the consequences of r-max< r-min though. If r-max< r-min results in immediate termination of the contract, then you might see wages stagnate or even decrease, depending on employer’s understanding of the employee’s situation. In general, I dislike this situation, since it incentivises employers to exploit workers who can’t afford a break in employment, squeezing them onto worse pay when they think they can get away with it. It encourages mind games as well—if the employer says “I’m thinking about setting r-max a little below your current salary” then they may convince the employee to lower r-min, and then even if the employer sets a reasonable r-max a little above the employee’s salary, the employee may lose out.
This is interesting, thank you—I hadn’t considered the case where an existing contract needs to be renewed.
I wonder why under your understanding predicts stagnating or decreasing salaries in this world? Currently, employees sometimes quit if they haven’t gotten a raise in a while, and go to other companies where they can earn more. In this mechanism, this can be encoded as choosing a higher rmin, which is set just at the level where the employee would be indifferent between staying at the company and going to job-hunt again.
I agree that this would have downsides for candidates with few other options, and feel a bit bad about that. Not sure whether it’s economically efficient, though.
(apologies in advance for the wall of text, don’t feel you need to respond, I wrote it out and then almost didn’t post).
To clarify, I wouldn’t expect stagnant or decreasing salaries to be the norm. I just wanted to say that there are circumstances where I expect this to be the case. Specifically, if I am an employee who is living paycheck to paycheck (which many do), then I can’t afford any time unemployed.
As a result, if my employer is able to squeeze me in this situation, I might agree to a lower wage out of necessity.
The problem with your proposed system is that it essentially encourages employees to selectively squeeze themselves- if they’re in a situation where they can’t afford to lose their job, then this will lower what they ask at a negotiation, and what they receive, even if the employer is offering the same rmax to all employees. This has little to do with their relative skills as an employee and everything to do with their financial situation and responsibilities outside work.
Here’s an example. I’m not sure why I wrote it, but here it is:
Brenda and Karl work at a gas station supermarket. They both work the same job, on the checkout area, with some shelf stocking as needed.
Brenda is a single mom with a 2 year old child who she is paying for childcare, and the rest of her earnings go on rent, food and fuel for her beat up car (it’s a miracle it’s still running). She works at the gas station 4 days a week, 9-7.
Karl takes on shifts 2 nights a week, it helps pay him through college and he enjoys the extra money. His parents give him enough that he could probably survive without the job entirely, and certainly a period of unemployment would not be a big problem for him.
Brenda and Karl both get paid $15/hr for their work, but they know that the new “payPlav system (TM)” is being introduced by management, and they have a pay negotiation coming up.
Management asks them to read the rules of the new system carefully submit their r-min. They say that if rmax < rmin, then the employee will stay on their existing salary.
Brenda sets her rmin at $15.50. She could do with a significant pay bump, but she doesn’t want to lose out on the pay increase entirely, since she’s only holding it together at $15.
Karl sets a bolder rmin of $16.50. He works hard at the job and thinks he deserves more, but it’s not a big deal if he misses out and stays at $15
Management sets rmax at $17
Brenda gets $16.25
Karl gets $16.75
I don’t think this is fair. It’s a clear case where the system creates a situation where employees who care less and need the money less will be rewarded more.
Here’s another scenario—same as the above, but management says that rmax<rmin will mean termination of the contract.
Brenda sets rmin at $13.50. She simply can’t lose this job, it would ruin her.
Karl sets his rmin to $16
Management sets rmax at $15.50
It’s more extreme, to be sure, and maybe a little unrealistic.
Many workers employed on zero-hours contracts end up in this situation—since the employer is able to lower wages with impunity and they don’t have many other options, they get squeezed for profit. Sometimes unscrupulous employers do this selectively, based on which employees can least afford to stop working. This results in the most impoverished employees losing out.
Does this require some sort of enforcement mechanism to ensure that neither party puts in a bad-faith bid as a discovery mechanism for what number to seek in their real negotiations? In fact, does anyone have actual data on what negotiations are even available in most employment situations—many companies seem to have figured out how to reduce this quite a bit over the last decade or two.
Does this require some sort of enforcement mechanism to ensure that neither party puts in a bad-faith bid as a discovery mechanism for what number to seek in their real negotiations?
Maybe there’s a misunderstanding here—the mechanism I was writing about would be the “real negotiations” (whatever result falls out of the mechanism now is what’s going to happen). As in, there can be a lot of talking about salaries before the this two-sided sealed auction is performed, but the salary is decided through the auction.
The current state of the art for salary negotiations is really bad. It rewards disagreeableness, stubornness and social skills, and is just so unelegant.
Here’s a better way of doing salary negotiation:
Procedure via a two-sided sealed-bid auction, splitting the difference in bids[1]:
Normal interviewing happens.
Job-seeker decides on their minimum acceptable rate rmin.
Employee-seeker decides on the maximum acceptable payment rmax.
Both reveal rmin and rmax, either first through hashsums of the numbers (with random text appended) and then the cleartext, or simply at the same time.
If rmax≥rmin, then the rate is rmax+rmin2 (i.e. the mean of the two bids).
If rmax<rmin, then no agreement takes place and both parties fall back to their BATNAs.
rmin and rmax do not need to be positive! It might be that the potential employee likes the project so much that they set rmin to zero or even negative—an exceptionally great idea might be worth paying for. Or rmax might be negative, in that case one party would be selling something.
I’m not aware of anyone proposing this kind of auction for salary negotiation in particular, Claude 3.5 Sonnet states that it’s similar to Vickrey auctions, but in this case there is no second price, and both parties are symmetrical.
I think that the setup described is probably not incentive-compatible due to the Myerson-Satterthwaite theorem, like the first-price sealed-bid auction. (I still think it’s a vast improvement over the current state of the art, however). For an incentive-compatible truthful mechanism the Vickrey-Clark-Groves mechanism can be used, but I’m still a bit unsure how the subsidising would work.
(I’m confident this isn’t incentive-compatible. Consider the case where you happen to exactly know the other person’s bid as an example. I do think it is a good baseline mechanism though. Because it isn’t incentive compatible, both parties need to precommit to no further negotiation if rmax<rmin.)
Sounds interesting. The question is, would it be better for companies than the current situation? Because it’s the company who decides the form of the interview, so if the answer is negative, this is not going to happen.
On a hypothetical nerdy planet where things like this happen, we could go further and let both sides specify numbers for various scenarios, for example what would be the salary for working in open space vs having your own office with doors, how much for work from home vs work in office, on-call vs no on-call, etc. Not sure how exactly to evaluate the results, but I think it might be good for the employers to have data such as “having open spaces is $X cheaper than having offices with doors, but our employees hate it so much that we need to pay them $Y higher salaries, so maybe it was not such a good idea” or “remote work makes people 10% less productive, but we could hire 30% more of them for the same budget”.
Yeah, I don’t think this is going to be adopted very soon. My best guess at how that could happen is if people try it in low-stakes contexts where the parties are ~symmetric in power, and this then spreads through e.g. people who do consulting for small startups, to salaries for high-value employees in small startups, to salaries for high-value employees in general etc.
Another way this could happen is if unions push for it, but I don’t see that happening anytime soon.
(I’m going to see whether me putting this up as a way of determining rates can work, but probably not.)
This incentivizes people to spend a lot of wasted time gathering information about what the other party is willing to pay. Which I suppose is true anyways, but I’d like to see a spherical cow system where that isn’t the case.
Yeah, the spherical cow system would be using the VCG mechanism with the Clarke pivot rule, but that would usually require some subsidy. There can be no spherical cow system which elicits truthful bids without subsidy, sadly :-/.
Or in other words, ‘let’s meet halfway’.
What do you think would happen to the rmin rate over time, in the absence of any methods of enforcing honesty?
The employee is incentivised to put the r-min rate as close as they can to their prediction of the employer’s r-max, and how far they creep into the margin for error on that prediction is going to be dependent on how much they want/need the job. I don’t think the r-min rate for new hires will change in a predictable way over time, since it’s going to be dependent on both the employee’s prediction of their worth to the employer, and how much they need the job.
For salary negotiation where the employee already has a contract, I would expect employees to set r-min at their current salary or a little above.
This prediction is fully dependent on the consequences of r-max< r-min though. If r-max< r-min results in immediate termination of the contract, then you might see wages stagnate or even decrease, depending on employer’s understanding of the employee’s situation. In general, I dislike this situation, since it incentivises employers to exploit workers who can’t afford a break in employment, squeezing them onto worse pay when they think they can get away with it. It encourages mind games as well—if the employer says “I’m thinking about setting r-max a little below your current salary” then they may convince the employee to lower r-min, and then even if the employer sets a reasonable r-max a little above the employee’s salary, the employee may lose out.
This is interesting, thank you—I hadn’t considered the case where an existing contract needs to be renewed.
I wonder why under your understanding predicts stagnating or decreasing salaries in this world? Currently, employees sometimes quit if they haven’t gotten a raise in a while, and go to other companies where they can earn more. In this mechanism, this can be encoded as choosing a higher rmin, which is set just at the level where the employee would be indifferent between staying at the company and going to job-hunt again.
I agree that this would have downsides for candidates with few other options, and feel a bit bad about that. Not sure whether it’s economically efficient, though.
(apologies in advance for the wall of text, don’t feel you need to respond, I wrote it out and then almost didn’t post).
To clarify, I wouldn’t expect stagnant or decreasing salaries to be the norm. I just wanted to say that there are circumstances where I expect this to be the case. Specifically, if I am an employee who is living paycheck to paycheck (which many do), then I can’t afford any time unemployed.
As a result, if my employer is able to squeeze me in this situation, I might agree to a lower wage out of necessity.
The problem with your proposed system is that it essentially encourages employees to selectively squeeze themselves- if they’re in a situation where they can’t afford to lose their job, then this will lower what they ask at a negotiation, and what they receive, even if the employer is offering the same rmax to all employees. This has little to do with their relative skills as an employee and everything to do with their financial situation and responsibilities outside work.
Here’s an example. I’m not sure why I wrote it, but here it is:
Brenda and Karl work at a gas station supermarket. They both work the same job, on the checkout area, with some shelf stocking as needed.
Brenda is a single mom with a 2 year old child who she is paying for childcare, and the rest of her earnings go on rent, food and fuel for her beat up car (it’s a miracle it’s still running). She works at the gas station 4 days a week, 9-7.
Karl takes on shifts 2 nights a week, it helps pay him through college and he enjoys the extra money. His parents give him enough that he could probably survive without the job entirely, and certainly a period of unemployment would not be a big problem for him.
Brenda and Karl both get paid $15/hr for their work, but they know that the new “payPlav system (TM)” is being introduced by management, and they have a pay negotiation coming up.
Management asks them to read the rules of the new system carefully submit their r-min. They say that if rmax < rmin, then the employee will stay on their existing salary.
Brenda sets her rmin at $15.50. She could do with a significant pay bump, but she doesn’t want to lose out on the pay increase entirely, since she’s only holding it together at $15.
Karl sets a bolder rmin of $16.50. He works hard at the job and thinks he deserves more, but it’s not a big deal if he misses out and stays at $15
Management sets rmax at $17
Brenda gets $16.25
Karl gets $16.75
I don’t think this is fair. It’s a clear case where the system creates a situation where employees who care less and need the money less will be rewarded more.
Here’s another scenario—same as the above, but management says that rmax<rmin will mean termination of the contract.
Brenda sets rmin at $13.50. She simply can’t lose this job, it would ruin her.
Karl sets his rmin to $16
Management sets rmax at $15.50
It’s more extreme, to be sure, and maybe a little unrealistic.
Many workers employed on zero-hours contracts end up in this situation—since the employer is able to lower wages with impunity and they don’t have many other options, they get squeezed for profit. Sometimes unscrupulous employers do this selectively, based on which employees can least afford to stop working. This results in the most impoverished employees losing out.
Does this require some sort of enforcement mechanism to ensure that neither party puts in a bad-faith bid as a discovery mechanism for what number to seek in their real negotiations? In fact, does anyone have actual data on what negotiations are even available in most employment situations—many companies seem to have figured out how to reduce this quite a bit over the last decade or two.
Maybe there’s a misunderstanding here—the mechanism I was writing about would be the “real negotiations” (whatever result falls out of the mechanism now is what’s going to happen). As in, there can be a lot of talking about salaries before the this two-sided sealed auction is performed, but the salary is decided through the auction.
I know of some software engineers who have published their salary history online.