Tagged: salary increases

How Compensation Decisions Are Made

How Compensation Decisions Are Made

Understanding how employers make compensation decisions is critical if you want to be effective in negotiating your own compensation package.

Compensation has been very much in the news during the past year.  From the fervor over a $15.00 per hour minimum wage to robots coming to take people’s jobs to an accelerating employment market, compensation is on the minds and hearts of just about everyone. Before you can begin to get a handle on any of these issues, you first must have a basic understanding of how employers make compensation decisions.

Current Factors Impacting Compensation.

Like any other aspect of compensation, trends in the current market are impacting the compensation offered for specific positions.  Here are five of the factors that dramatically impact compensation ranges for virtually every position:

  1. The value of the work being done. Labor costs are almost always the single largest expense item incurred by any employer, other than the costs for the goods and services produced.  Labor costs include components such as base compensation (hourly or salary), variable compensation (such as bonuses or commissions), benefits, payroll taxes, and related insurances. So there is always pressure to assure that the value produced by each employee exceeds the costs associated with that employee.  Because the market sets to price for the goods and services it consumes, compensation must be tied to the value of what an employee’s work produces – or the employer cannot afford to remain in business.
  2. Supply vs. demand. This factor affects both industries and regions.  If there is a shortage of qualified candidates for a position in a particular area, compensation will tend to be on the high end of the range, with some employers electing to pay sign-on bonuses to attract candidates.  Likewise, if there is an over-supply of qualified candidates, compensation will be on the lower end of the range, with relatively few people hired in the higher ranges of compensation.  You will need to understand the dynamics of your industry and region.
  3. New job vs. raise. People changing employment (either inside their own company or moving to a different employer) tend to have larger compensation increases available, versus those staying in the same job or role.  The typical range for an annual increase is about 3%, while the average increase achieved when changing jobs is about 10%.
  4. Difficulty of filling the position. The difficulty an employer has experienced or (is anticipating) in filling the position will tend to increase what the employer is willing to pay.  Highly specialized skills, experience, and education are often the largest reason for the difficulty in filling a position.
  5. Benefits add 10% to 70% to total compensation. While benefits such as healthcare have been in the headlines during the past few years, the cumulative value of non-salary benefits is significant.  Here is an excellent calculator from CalcXML to determine the value of the benefits being offered.

The Mechanics of Compensation Decisions. 

Employers have established a range of what they are willing to pay for a particular position.  For example, a position with a target average annual salary of $55,000 might have the following range:

  1. Minimum – $45,000
  2. Mid-point – $55,000
  3. Maximum – $65,000

The interview process – the candidate’s credentials (résumé, social profile, and the like) and the results of any pre-offer background check (references, social media) – all influence where within the compensation range the initial offer will be made.

Researching compensation.

This can be done via the internet by Googling salary ranges or visiting compensation sites such as salary.com, the Bureau of Labor Statistics, or payscale.com. Because information may be self-reported, tend to view these figures as optimistic about the position evaluated.  While the information provided on these sites is generally accurate (± 10%), there are regional differences, as well as differences from organization to organization.  Another helpful site for salary research is Glassdoor, which provides an inside look at jobs, companies, and compensation (as reported by current and former employees).  When calculating total compensation, bear in mind that benefits can be worth as little as 10% of base compensation, or as much as 50% or more.  Employer-paid expenses, travel allowances, hiring bonuses, tuition programs, insurances, paid time off, and other benefits add up quickly.

Some companies provide a lower starting salary, with a compensation increase once the new employee completes his/her training period (usually 90 days) and proves him/herself.  In a slow economy, there is an abundance of people looking for positions, so salaries can be somewhat depressed.  Likewise, when the economy is booming, starting salaries may be increased to attract better candidates.

Finally, understand that regional cost-of-living factors greatly affect the market-based compensation for any position.  A $60,000 position in an average cost of living area may translate to $48,000 in a low-cost area and $110,000 in a high-cost area.  Based on the relative cost of living of the area, the $48,000, $60,000, and $110,000 benchmarks reflect the same equivalent purchasing power.

Bottom Line

Like anything else in life, proper preparation prevents poor performance.  Never enter into a compensation negotiation without first having done your homework, with includes not only understanding how compensation for the position is established and what the reasonable ranges for compensation for your position by market, but also how you can prove that you’ll be able to deliver excellent value for the compensation you desire.

This article was excerpted from the most recent edition of Get a Better Job Faster? now available on Amazon.com.

Is This The Year You Get The Big Raise?

If significant increases in your pay check are a long time in the past, maybe your resolution for 2015 should be a commitment to scoring a significant increase in your compensation.

Prepare before you ask. Start now to document what you do.  A daily log detailing how you spend your time can show you and your boss what it is you do all day. Keep track of phone and email time, too. You can use a spreadsheet or a page of notebook paper to keep a record. What you may find is that you spend much of your time assisting co-workers, or in meetings. You may also find that you have taken on duties that weren’t part of your original job description.

Knowing what you do during the work day will highlight the ways in which you add value to the company by generating income, solving problems, saving time or money.

Document training. Inservice and outside of the company learning opportunities count. Again, a spreadsheet is helpful. Column one is date; two is title; column three is provider; four is material covered; five is how you’ve applied the training in your work.

If you’re a person who has learned additional jobs in the company by watching others, helping co-workers or by taking time to find out how others’ jobs impact your own, document that too.

Next, create a resume of your projects, accomplishments, team leadership. Be specific about your contributions and their results (brought in $100,000 new business). Don’t assume that your boss or others in the company know what you’ve accomplished.

Know your worth: find out what your position pays elsewhere. National statistics from organizations such as salary.com are an aggragate of information from a variety of places and might not reflect local job conditions.

Put together a pitch for you boss using evidence of your increasing value. When you feel ready, choose a time and make an appointment to sit down for a talk. If the company does an annual review, that could be your chance for a one-on-one.

Your pitch should contain a review of your recent work highlighting your success and demonstrating your value to the company.  Get feedback from your boss so that you can clarify or reinforce your roles.  Ask for an increase in monetary compensation based on your contributions to the company; if appropriate, point out what the competition is paying for someone with your experience.  If you want a 3% increase, ask for a bit more so that there can be compromise.

If you are told that there isn’t money for the raise you were hoping for, or any increase at all, be ready to ask for perks instead.  This could be working from home one day per week or 4 ten hour days instead of 5 eight hour days.  It could be a parking spot or paid parking, increased use of a shared assistant, a title that covers all of your responsibilities.

Titles won’t pay the mortgage but may give you a bump when you apply for your next job.

Good luck; let me know how it goes!