Setting Lower Bounds in Negotiation

Lower bounds in your offer gives you optionality in the future

There have been two times in my career where I negotiated aggressively with a candidate to a low compensation that they were going to accept, then raised the compensation at the end before closing the deal. This is because the offer negotiation is not a one-time event, but rather an iterative event with the new hire if they accept the offer. As a result, for the manager it is important not only to understand where your range should be for your negotiation, but also what the lower bound is. Negotiating an offer below this lower bound will create issues for you in the future if the candidate accepts the offer.

Specifically, the lower bound of the offer negotiation should be a number that allows you to adjust their compensation to a fair value 1-2 years in the future if they end up performing at the upper bound of your expectations.

The reason why a too-low negotiated offer can happen is due to the uncertainty in the conversion of the candidate and the manager. Because the candidate doesn’t know the manager’s conversion curve, and the candidate does not know the manager’s, the offer negotiation allows the two parties to understand each other’s ranges and get to a compensation number that has some chance to close.

In a well-behaved scenario, usually with experienced candidates and hiring managers, the range of uncertainty tends to be relatively small. This allows both the manager and the candidate to quickly understand what the negotiation range is, and then much of the negotiation is working within that boundary (see image below).

However, if the candidate is unsure what their value to the company is, and especially if they have no other competing offers, they have no strong prior of what compensation ranges they should expect. As a result, they tend to have a very flat, and high conversion curve - that is, they will take the job as long as the compensation number is not insanely low (see image below). This often happens with high potential new grads, who may have high slope, but otherwise have no track record or industry experience.

In this scenario, the hiring manager can negotiate the compensation to an extremely low level without materially affecting their chance to convert. While it might be tempting to do this for the manager, there is a level where negotiating below it becomes highly suboptimal.