Have you ever thought about how companies decide on their formal compensation structure? There are many elements like the industry you are in, type of roles, business profitability, availability of talent, labor laws and unions, economic conditions (i.e. inflation, taxes), etc. that contribute to this.
Despite these variances, there are several tools and strategies that companies can use to determine their salaries and pay structures. Here are some of them:
Pay Scales
Most established companies have a specific pay scale that they generally adhere to. The pay scale usually plots the salary ranges for different positions in each department. It also indicates the salary progression as the employee accumulates more years of experience and tenure with the same employer.
Pay scales are typically a function of HR but are determined with the input and approval of management. The point is pay scales should recognize the level of knowledge, skills, education, years of experience, and any other competencies that are essential for a particular job. These elements come together to determine an appropriate salary at each career level.
Market Benchmarks
Without doubt, managers and HR professionals do not arbitrarily pick their salary ranges and pay rates. Even when constructing their own pay scale, they often need to look at labor laws, market averages, and industry benchmarks. This is to make sure that they do not undercompensate or overcompensate their employees for their work.
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Previous Salaries
Another tool that employers often rely on to determine their pay rates is knowing the employees’ previous salaries. On a job application or during the interview, an employer may ask the job candidate how much they were paid in their previous position(s). The number given by the job seeker would be used as the benchmark and would help the employer determine how much to offer.
Negotiation
One thing to keep in mind is that salaries aren’t set in stone. Most often than not, job candidates and employers engage in a negotiation phase. This could start during the job interview. Employers often ask about salary expectations, which would let them know if the job candidate will fit or break their hiring budget. Though not recommended, job seekers sometimes bring up the salary question during their interview.
Once a job offer is extended, negotiation often takes place in order to arrive at the most reasonable compensation. Some companies, however, are inflexible and do not negotiate their offers.
The full package
Another thing to remember is that compensation includes more than just the salary. Without doubt, this could vary hugely. Some companies offer a fixed pay structure. Some offer a commission-based compensation. Others combine the two.
However, many compensation packages include benefits. Things like health insurance, transportation housing or education allowances, and such are to be considered when looking at and negotiating a salary.
Some companies prefer offering lucrative benefits in lieu of higher salaries. Others offer competitive salaries but little to no benefits. It is important to look at the value of the compensation package as a whole.
Added value
Finally, keep in mind that salary decisions can also be circumstantial. If a company is interviewing an amazing candidate, who has a very impressive experience and skills, yet an expensive salary expectation, it is not unwise to bend the salary ranges a little bit.
When employers are truly interested in hiring the best of the best, the chances are they will need to offer more in return.
As a result, hiring managers need to evaluate the “added value” of a new hire in order to determine how much they should be compensated. Ask yourself questions like, “how much is their experience worth?”, “Are their skills in demand?” What about their education? Their potential? These questions are often answered on a case-by-case basis to determine the right compensation package.
