"Then how do you decide how high to go in negotiations?"
You discuss it with the prospective employee. You make a guess at what they are worth to your organization. If they disagree, they explain why they think that they are worth more. Explanations may include new information about what other companies in the market believe that person to be worth.
Without negotiation, you make a guess, the prospective employee tells you that they disagree.. and you're done. You've wasted that entire recruiting and interviewing cycle.^ It doesn't matter if both parties want to work together; without negotiation if the hiring party makes an incorrect guess then they do not get to work together. Any correction or attempt to re-guess falls under the umbrella of negotiation. Perhaps they could reapply, go through the interview process again, and have you attempt to guess a good salary again, but that is nothing but inefficient negotiation.
You could publish the offered salary before the beginning of the interview process, making that information known during recruiting, but then any attempt to communicate with failed recruiting attempts would be again another form of negotiation. Recruiter contacts a developer, says "I've got an position for you to look at, it offers $120k/yr" and the developer responds "I am worth at least $140k/yr"? If the recruiter relays that information to the hiring party, the hiring party would not be able to act on that information and adjust the offer because that is just pre-interview negotiation.
"Make the initial guess the maximum you would be able to pay somebody in the most extraordinary of situations" is very obviously not a viable strategy. I hope I don't have to explain why.
-edit-
^ Note that while this is bad for the prospective employer, it will often be even worse for the prospective employee, who in many cases will be looking to become hired as soon as possible as they are either in an unsatisfying job (in which they are forbidden from asking for a raise...) or worse, unemployed. Without any negotiation, an unemployed person would be placed in the wildly unfair position of being forced to immediately settle for an unsatisfactory salary, or spend more time without income looking for and applying to another job.. hoping that that one doesn't accidentally lowball the salary. Most unemployed prospective employees would tend to settle immediately since some income is generally better than no income. In this way, bans on negotiation screw over individual employees and place unemployed people in an even tighter bind than they are in currently.
My company does the no-negotiation thing (and has done so for about 13 years now) so I'm surprised to learn that its a completely unreasonable model.
On a more serious note, the way we choose a salary is to look at various similar companies in the area and get an idea of what a competitive salary for the position/experience level is. If people are happy with this (they almost always have been, at least since I started) they take the offer; if they aren't, they don't. Its pretty simple, and avoids the issue of paying people for being good at negotiation, which as far as I can tell has no correlation with being a good developer.
Coincidentally my current employer does not negotiate either (well, not for standard developers...)
Our companies can safely refuse to negotiate because 1) they can let other companies in the area negotiate to set prices for them (without negotiation, determining the value of an employee becomes massively inefficient, mostly at the expense of the unemployed, who will tend to accept positions lower than they could negotiate for, lowering the overall regional salary), and 2) because generally for standard dev positions, they are aren't looking to hire a specific person. Any person that fits the roll will do, and there are plenty.
You want a college grad to start training on your software stack? Well sure then, figure out the regional salary for recent college grads, offer lots of college grads that salary, and take those who accept. So long as you have enough grads to choose from and eventually the positions get filled, who cares right?
You want recent Standford grad Joe Smoe who recently made waves online demoing that really cool shit that accidentally compliments [Top Secret Project]? Without negotiation, fat chance. There are no regional stats for Joe Smoe's expected starting salary. You either negotiate or your gamble.
If you are finding an employee to fill a position, you can get away with no negotiation if others in the industry still negotiate. If you are creating a position for a person, you have to negotiate.
If every company were forced to acted as our companies do, and for every position that they were filling, it would be catastrophic.
You may have missed out on some good people over the sake of a few k... especially if they (for instance) have domain specific knowledge that puts them ahead of other folks in the same sort of bracket?
You discuss it with the prospective employee. You make a guess at what they are worth to your organization. If they disagree, they explain why they think that they are worth more. Explanations may include new information about what other companies in the market believe that person to be worth.
Without negotiation, you make a guess, the prospective employee tells you that they disagree.. and you're done. You've wasted that entire recruiting and interviewing cycle.^ It doesn't matter if both parties want to work together; without negotiation if the hiring party makes an incorrect guess then they do not get to work together. Any correction or attempt to re-guess falls under the umbrella of negotiation. Perhaps they could reapply, go through the interview process again, and have you attempt to guess a good salary again, but that is nothing but inefficient negotiation.
You could publish the offered salary before the beginning of the interview process, making that information known during recruiting, but then any attempt to communicate with failed recruiting attempts would be again another form of negotiation. Recruiter contacts a developer, says "I've got an position for you to look at, it offers $120k/yr" and the developer responds "I am worth at least $140k/yr"? If the recruiter relays that information to the hiring party, the hiring party would not be able to act on that information and adjust the offer because that is just pre-interview negotiation.
"Make the initial guess the maximum you would be able to pay somebody in the most extraordinary of situations" is very obviously not a viable strategy. I hope I don't have to explain why.
-edit-
^ Note that while this is bad for the prospective employer, it will often be even worse for the prospective employee, who in many cases will be looking to become hired as soon as possible as they are either in an unsatisfying job (in which they are forbidden from asking for a raise...) or worse, unemployed. Without any negotiation, an unemployed person would be placed in the wildly unfair position of being forced to immediately settle for an unsatisfactory salary, or spend more time without income looking for and applying to another job.. hoping that that one doesn't accidentally lowball the salary. Most unemployed prospective employees would tend to settle immediately since some income is generally better than no income. In this way, bans on negotiation screw over individual employees and place unemployed people in an even tighter bind than they are in currently.