You’ve gotten approval to hire for that desperately needed position and are ready to start the recruiting process. Congratulations, but don’t post a job quite yet. First, you need to define what this new hire salary will be.
Many organizations “wing it” when it comes to determining salary for a new employee, but that approach can backfire and result in you losing your top candidates. Don’t let that happen to you. Follow these steps to help guide your decision making when it comes to new hire compensation.
The first step in calculating new hire salary is to ensure that you have a well-written job description, which includes duties and responsibilities as well as the skills and qualifications needed to do the job. You may want to compare your description with those found on job boards or professional association sites to create a job description that aligns with what other companies are doing. This will also help with compensation benchmarking (more on that in a moment).
Your company may have a stated or unstated pay philosophy that guides new hire compensation decisions. You may pay more than your competitors, the same, or less. What determines this? Your company’s strategy.
If you are a growing business with specialized positions in a tight labor market, you may need to pay more than other companies to hire the level of talent that you need. If your organization is a mature company that is not growing, and in a location with an abundance of talent, you may wish to pay less than other companies.
No matter what your company’s standing is, you’ll still need to be flexible. Even if your pay philosophy is to provide the same level of compensation as your competitors, you may have an opening for a key position in high demand that necessitates paying a premium to hire the right person.
Once you’ve finalized the job description and taken your pay philosophy into account, it’s time to compare the position with similar roles in the market (also called compensation benchmarking or salary benchmarking).
You’ll want to consult several outlets when looking at salary data. As with any kind of research, it’s important to use multiple data sources to help mitigate the errors or inadequacies of a single source and get closer to the "true" answer.
Be careful with the free data found on sites such as LinkedIn, Glassdoor, Salary.com, and PayScale. These free options are generally too broad in terms of industry, geography, company size, or other factors, and they derive their data from employees rather than employers. Professional associations often present a better option and sometimes offer free or discounted salary data to their members.
To obtain current, accurate salary information, you will likely need to purchase salary data or conduct your own market research by talking to others in your field about what they pay for similar jobs. You could also outsource the salary benchmarking to an HR or compensation consultant.
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It’s finally time for compensation benchmarking! When it comes to calculating new hire salary, a common pitfall is to benchmark based upon title. However, since titles vary between different companies, it’s important to focus on the actual job duties, levels of responsibility, and years’ experience required of the position, not the title.
Remember that every position is unique to your company, so it may not be possible to find an exact match for your job. Accordingly, when determining salary for a new employee, you’ll want to look at jobs that closely match the primary duties of that position, or take a hybrid approach and consider looking at multiple jobs.
Surveys provide different “cuts” of data and enable you to look at what other companies of similar industry, revenue, geography, size, etc., pay for comparable positions. Many organizations target the 50th percentile, which is the most common pay philosophy and means that 50 percent of companies pay more for his job and 50 percent pay less.
Dan Pink, motivation theorist and author of Drive: The Surprising Truth About What Motivates Us, encourages businesses to pay as much as their budget allows. Pink’s research demonstrates that people are motivated by autonomy, mastery, and purpose. Therefore, “the best use of money is to take the issue of money off the table ... Effective organizations compensate people in amounts and in ways that allow individuals to mostly forget about compensation and instead focus on the work itself.”
Once you’ve decided on new hire compensation, you may also want to review the salaries of current employees to avoid pay compression. This situation can occur when employees of differing experience levels or skill sets receive similar pay.
If not properly managed, this can create morale issues at your company and cause pressure for you to realign salaries up the ladder to maintain internal equity within your salary structure.
When determining salary for a new employee, many companies simply add 10 or 15 percent to the candidate’s current compensation. In addition to the fact that this is not a sound pay philosophy, nor is it based on market data, the practice of asking for salary history is increasingly becoming illegal in many states and jurisdictions due to the fact that it can exacerbate past discriminatory pay practices. Your offer should be based upon what the market would pay for a similar position.
Salary transparency is a hot topic and, more than ever, employees and job seekers know their worth. Today’s job seeker is very well-informed, so, don’t insult your candidate with a low-ball offer. Put your best foot forward or risk losing your candidate to a company willing to pay them what they’re worth.
Perhaps you have budget constraints that restrict your ability to pay at the 50th percentile or higher. Consider sweetening the compensation pot by offering a sign-on bonus, an extra week paid time off, or an early performance and salary review.
Determining salary for a new employee doesn’t have to be difficult, but it does require a proactive and deliberate approach on your part. Effectively negotiating compensation with a candidate is vital to hiring new talent, so do your research and planning before making your next hire.