When it’s time to set compensation for a new or vacant position, many small and midsized companies find themselves at a loss. Without a bona fide compensation expert in-house and lacking the budget to hire a $3,000-a-day compensation consultant from a fancy firm, they sometimes resort to guessing games based on insufficient data of questionable quality.
“Many clients say, ‘I don’t know what I need to be paying,’ ” says Barbara Schneider, director of staff sourcing for Oasis Outsourcing in Jacksonville, Fla. “Often a client isn’t offering competitive pay.”
What can companies with tens or hundreds of employees do to ensure that they’re setting salaries that will bring in and keep the best possible talent, without overextending? We’ve asked a few professionals who deal with these issues every day.
Typical Approaches, from Random to Research-based
Companies with fewer than 1,000 workers often take one of three approaches to setting salary, according to Al Lee, director of quantitative analysis at PayScale in Seattle.
Employers may ask a recruiter what the most recent hire into a similar position was offered, or they might simply choose a dollar figure, based solely on anecdote and instinct. In other instances, they may look at compensation data from a broad range of sources, from the Bureau of Labor Statistics, to free or inexpensive resources like some of the information on Salary.com or PayScale.com, to survey reports from major HR consulting firms that may cost thousands of dollars.
A lone recruiter’s anecdotal experience, however pertinent, is unlikely to provide broad enough information about the labor market. Executives who depend on this information risk poor hires on the one hand and excessive labor costs on the other.
The disadvantages of the second approach, essentially pulling a number out of the air, seem obvious. But this road is taken by many executives at financially strapped firms. If you set a fixed salary for a hire, with the attitude of “We’ll get the best techie that can be had for $40,000,” you may end up paying too much, especially if all you need is someone to set up and maintain a simple PC network. But setting an arbitrarily low starting salary, even in an economy threatening to workers, carries its own risks. “At any price point, you can always get somebody, but they may not be able to do the job,” says Lee.
Dig Deep for Meaningful Data
The most prudent approach is based on research involving, at a minimum, hundreds of employers or thousands of workers. Salary surveys from blue-chip consulting firms like Hewitt or Mercer are one avenue, though not the cheapest. Mercer’s 2008 salary survey on financial operations positions, for example, costs $2,610. Compensation information available online from companies like Salary.com and PayScale is sufficient for many small to midsized firms. “Salary.com has a free offering that gives a really nice range from which my clients can work,” says Schneider.
When employers do delve into salary data, it’s important that they go deep enough to emerge with a well-rounded perspective, according to Susan Schoenfeld, senior legal editor at Business & Legal Reports in Old Saybrook, Conn. “Many times small and midsized employers use generic numbers and get scared,” says Schoenfeld. “But if they drill down far enough in the demographics of their labor market, they’ll probably find that they don’t have to pay as much as they feared.”
Interpret Data in the Context of Your Organization
Some recruiters like to supplement their broad-based research with anecdotes from today’s labor market. “I sometimes look at Monster to see what real people are earning now,” says Schneider. “I’ll plug in the details and find out what candidates want and what they’re making now. That, to me, is tangible here-and-now information that my clients need.” But anecdotal information such as this should only be used together with more broadly based data.
Unlike custom research, the relevance of standardized salary reports, whether presented online or in print, is limited by the categories used to create the reports. “Job titles and their associated responsibilities are not always consistent across companies,” for example, according to a briefing from Salary.com. These sources typically attempt to account for the value of specific academic degrees or other training, regional and local variations in pay and other factors. But they can’t capture every variable relevant to every position that comes open.
Real-World Caveats for Compensation Research
Some experts say that the optimal compensation for a given job can’t be determined out of the context of a specific employer. “We believe in demand-driven pricing,” or setting compensation according to the value of the position in the organization, says Jean-Pierre Sakey, president of Headway Corporate Resources in Raleigh, N.C.
And in the real world, to snag who you want, you might feel pressure to extend the salary range with which you began the talent search. “You may need to make an adjustment if you want to land a top-ranked individual,” says Sakey.
But Schneider urges caution to the manager who is making an offer to a star candidate that’s significantly above what incumbents at the same level are earning. “If you have several people doing the same job, you have to be careful with issues of discrimination,” she says.
And of course, extraordinary situations like the financial-market crisis of 2008 create large and unpredictable disruptions in pay scales in specific occupations. “Some investment bankers and analysts will see their compensation change dramatically,” says Sakey. “But in general, labor pricing is not that variable according to whether the economy is up or down.”
Regardless of the economic environment, it’s important to keep a pay scheme up to date. “Once you’ve set those compensation levels, make sure you reassess pay structures at least every three years,” says Schoenfeld. “Also watch those annual pay surveys to make sure you’re competitive year to year.”