Saturday, June 17, 2006

What Salary should you offer a New Employee

Updated Response on June 19, 2006: Link

One of the most difficult topics facing managers today is compensation. There are several factors that come into play, and software further compounds these issues since it is the only field that I know of where the same job can have a 30%, 40%, 50%, or even 100% swing between companies and even employees at the same company.

This was a dilemma that came up for me this week; I decided to make an offer to a candidate from another company, and the offer would be a promotion for him. He was moving from a test engineer to become my test lead with a few direct reports. His current salary was within the range for his position, but towards the lower end. He was an impressive candidate with more than 10 years of experience, and 3 years of experience with a competitive product to ours, so he would be able to ramp up very quickly with a domain specific product. Here are the three scenarios I could choose from:

  1. 15% Raise. This is a fairly standard tactic. You want to give a candidate incentive to move, but you don't want to give them too big of a salary jump. Personally, I don't believe in this theory and think you should pay an employee based on ability, not what their previous employer was paying them, but nonetheless, this is a widely held practice. For my situation in particular, a 15% raise would put the candidate at the bottom of the range for a test lead, but still making more than the direct reports he would assume. This is typically pushed by HR who never wants to knowingly see an employee jump more than 15% in salary, or by managers who have rule-based compensation procedures.
  2. 30% Raise. A raise of this size would put him at the ideal midpoint in the test lead range. In the world of fairness, keep in mind that the real world isn't fair, this is where the employee should be. If he is qualified for the job, then regardless of what he asked for or what he used to make, he should be offered the target salary for the position. I know this is a candidate's best case scenario from a hiring manager, and takes some of the fun out of the negotiation, but I'm a firm believer that compensation is not a game you want to play with your staff. Personally, if you can take salary off the table as an issue of contention amongst your group, and make sure that your employees are compensated fairly compared to the market, I think you get exponentially more productivity from them. My experience has shown that money is the number 1 issue of complaint, and also the number 1 factor in morale and general happiness. As far contrary remarks about budgets, outrageous salary demands, escalating salary ranges in the market, and the rest, I still believe it is a small price to pay when compared with the costs of recruiting, hiring, and training a new employee. For those small companies that cannot afford the higher salaries paid by more established firms, you still have plenty to offer: bonus incentives, stock options, company equity, balloon payments, etc... There are always creative options.
  3. The Low Ball. This is the other tactic that is out there. Offer a candidate less than you're willing to pay. Offer what they're making now. Offer a 3% - 5% raise. Basically, less than would be fair, and less than you'd accept if you were in a similar situation. Try to sell the point of the opportunity, and it is worth more than the money to be made somewhere else. These are all fair tactics, just not ones that I subscribe to. Refer to point #2 for why I think compensation needs to be fair, but basically I think this approach leads to a disgruntled employee 6 - 12 months down the road when the experience is not what they thought it was, or they had a bad or stressful week, or anything to make them even marginally unhappy. The immediate thought will be "I'm not paid enough to put up with this." This thought leads to reduced productivity, reduced morale, and those attitudes spreading throughout the rest of your team.

I'm interested in feedback. What would you do in this situation? What is the right approach? Does giving a 30% raise set an expectation that annual raises are more than a standard 4% - 6%? Well, I ended up going with option #1 to satisfy my manager and HR, with an already budgeted plan of giving the candidate another 10% raise after 6 months of probation / performance review.

Did I miss any other options? What are some other tactics for luring away an employee? These are basically the options I considered, but I'm sure there are more out there.

I look forward to any comments below .....

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digin said...

Firstly, I'd suggest never lowball - you could lose a valuable potential employee.

My approach is always to try and pay fairly both within my organization and in relation to the market. If a person is currently paid below market in your case, I'd probly do the following:

(1) Offer him the 15% raise to get him to move.

(2) In his first week starting, put in a plan that will give him another 10% raise / bonus in the next 6 months depending on meeting certain targets.

I think with the above plan you get to pay the guy within 6 months what he is really worth, and at the same time get some real hard work/commitment in the next couple of months - a win-win situation both ways.

I think once you have made the six-month raise, it would be wise to sit down with your employee and let him know that the big bump was mainly aimed at getting his salary level in line with what he is worth, and is largely a once-off. Future salary raise will most likely be a lot more modest.

Rajneesh Garg said...

I would suggest a mix of many things.
As u say, the guy is a Test Engineer and would join u as a Test Lead i.e. a promotopn, it simply imples that the new Compensation package would no longer be governed by the T.E. level.
I would suggest:
1. A compensation package for an entry level Lead,
2. A couple of incentives (ESOP, Bonus...),
3. A 5% hike based on Quarterly performance for 1st year.

Anonymous said...

Going with the salary that is appropriate for the position is probably the safer choice. If the employee finds out that everyone makes more than him, especially people he considers less skilled, then he will likely feel abused and seek to leave the company.

I disagree with the assertion that money is the #1 source of complaint though. I moved to my current position and received a 16% increase, but also a large cost of living increase. My target number for this area would have been a 25% increase. This number does not make me "happy", but it also wouldn't drive me to leave for ~3 years.

What is going to drive me to leave is that the projects are mismanaged and it resulted in excessive overtime recently. Doing 6+ weeks at 70+ hours a week is unforgiveable unless multiple extra weeks of vacation are provided.

On a related note, if your company cannot afford to pay a competitive salary, then you could compensate by offering more vacation time. That is more valuable to me than the money.

Phill said...

You pay the 30% raise. Like you said, it's what you think is fair for the position. Does it set high expectations? I don't think so.. what it sets is the expectation that you're not making decisions arbitrarily (sp?)...

When I came to my current company I told them what I wanted, which was the salary I had just been increased to at my existing place. They lowballed me at 5k below. That was stupid for a number of reasons. First of all, it's 5k! It left a terrible taste in my mouth because it sent the message this was a company that split hairs and didn't know how to pick their battles. I took the job anyways, and encountered this attitude a lot until my manager was replaced.

Under my new manager a couple of pretty incredible things happened. First, he noticed that I was acting as a lead even though I hadn't been identified as one. He acknowledged this to me in a review, and raised my salaray 20% in a _single year_. It was unprecedented, in my experience.. but he defended it because that's what the other leads had made and he thought it was fair. He didn't buy into any of the going 'common sense' about why not to do that.

I don't expect that I'll be getting a raise like that every year. In fact, this was the only raise that I could trace to a real-live-truth. Most of my career salary increases have been doled out arbitrarily.

You said it yourself, life's not always fair. Here's an opportunity to surprise an employee out of the gate with an action that proves you're not everyone else. It proves that you're paying attention to him, and not basing your salary decisions on whatever he's currently making, plus a little bit.

If you do anything else but decide on a fair salary and give it to your employee, then what good are you? With all due respect, you can be replaced with a calculator if you're just going to add 15% or subtract 5k to current salaries of folks who walk in the door.

Jacob said...

Offering less than going market rate is insane from a long-term perspective. You might save money in the short run, but eventually your employee is going to figure our what they're worth and go looking for it.

That said, hiring people is a very real risk. Someone can look very good on paper and present himself well and turn out just not to work. If you can handle firing people who aren't working out, I say go for market value. I mean, one of two things happen when you hire someone at what you think they are worth: They are as good as you thought and are happy with their salary or they aren't as good as you thought and an adjustment needs to be made. The trick is to make sure that a) you know what you need and b) you know how much you should pay for it.

Anonymous said...

Pay him what he's worth. You pay him less than he's worth he'll be angry from the door. You pay him too much you'll be angry from the door. Forget the accounting and management BS you have to go with with what feels right as a person. Your chemistry with him over the years he works with you have to worth more to both of you than a few grand.

You think he's a great candiadate and your implication is he's at the low end of the pay scale, you can easily afford to give him the 30%. 10 years in the industry is a long time anywhere.

Mangers very often over focus on salary numbers and forget to honor the implicit respect for the person necessary for a positive and productive relationship. If the guy is a good earner he's going to bring in or aid the bringing of many multiples of his salary year after year. Again why quibble over a couple grand up front.

If he's good be generous and reap the rewards.

Clim Polygraphovic Cugunkin said...

15% raise to get him moving? You gotta be kiddin', right? 30%, better, but still may be not enough; 40% outright sounds more like it.

Before you ask: no, to the best of my knowledge I am sane. Let me explain my idea of a "fair salary increase".

Lets start off by looking at things that extra money could buy. Well, not really things themselves, for as we all know tastes differ and it's difficult to predict how anyone getting a pay raise is going to use the extra cash they get. Lets take a look at pricing instead.

Most things traded can be defined using a scale of: basic -> standard -> luxurious. As I say it can be applied almost to everything you can by on a free market: basic house vs. luxurious house, a basic barely moving car vs. a nice shiny sporty one, McDonalds vs Ritz etc. Even almost every supermarket store would have a basic, a standard and "finest" line of products.

Besides an apparent increase in quality, size and features items to the right of the scale are more expensive, it's a common knowledge.

However, to get a visible increase in quality (or size etc) of an item or service, to get on a next step of a consumption ladder, you usually have to pay at least 20-30% extra. For example, a brand new BMW 3-Series retails for around £21,000 and a BMW 5-series is already a £,000. This is a increase.

Hence the idea: to visibly improve a quality of life (or quality of goods and services consumed which is not always equal to the quality of life) one has to spend at least 20-30% more.

15% just ain't gonna make it. Add a progressive taxation, a need to move, change enviroment etc.

The biggest pay raise I was offered in my professional life to change an employer was 66% and I was paid on higher end of a market average before the offer. After weighting all pros and cons I've accepted the offer subject to contract only to be offered matching pay raise with my then current employer, which I finally accepted.

Clim Polygraphovic Cugunkin said...

Some missing data to the last comment:

BMW 320d Manual is about £21,000
BMW 520d Manual is about £26,000

ca 30% difference.

Anonymous said...

I would certainly get as close to #2 as possible. While I understand the allure of going with option #1, it doesn't really make sense. After the probation period, either the employee will do great and get the 10% raise (and you've been under paying him the whole time -- not really fair), or he won't meet expectations and will be unhappy that he doesn't get his bonus -- and likely quit or have worse performance.

My theory is to always pay what the employee's position deserves. If after a period of time the employee isn't performing up to expectations, then further training or corrective action needs to happen.

There are so many factors that can add to employees' poor performance, why would you want to add compensation to the list?

All of that assuming that you made a mistake in hiring the person (because he wasn't at the level you evaluated him to be in the interview). Most likely he'll be a great employee and paying him less than he deserves is both unfair and dangerous.

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