Negotiating Compensation – High, Low, Meet in Middle or Fair Number From Start?

The past couple weeks I have been thinking about/working on executive compensation, and it struck me that I’ve been exposed to one negotiating style far more often than another.

One tack is that one party (the executive, in this example) proposes a number higher than s/he really wants, and expects that he will be negotiated down. The other party (the company) proposes a number much lower that’s closer to reality, but probably shoots lower than they otherwise should because they know the executive will ask for something in the middle. There’s probably a technical term for this, but I’ll call it the higher, lower, middle approach.

The second tack is when both parties sit down and try to figure out the most reasonable compensation package based on comparable data and executive performance. This is difficult, because neither party wants to leave money on the table. Also, for their own cognitive sanity, each party wants to feel like they tried to get the best possible deal for themselves, and negotiating – even when irrational – helps achieve this. Though I’ve never participated in this kind of negotiation, I suspect the Fair Number from Start style results in better, mutual feelings.

Either case is susceptible to the anchoring heuristic fallacy as outlined here. Whoever makes the initial proposal takes advantage of this.

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