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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