When it is time to make an employee an offer, many small businesses find themselves at a loss as to how much compensation should be offered.   The Magic 8 Ball will not tell you, nor will the answer fall out of the next tree that you walk by.  Aiming too high could blow your budget out of the water, but aiming too low will result in a horribly bad hire.

It is All About Gut.  Isn’t It?

Bottom line is that managers just do not know what to pay.  In a perfect world, there would be comprehensive report app that highlights every job in the area, and it would be color-coded!  Barring that, a magic formula (akin to the Magic 8 Ball) would be nice.    The problem is that a comprehensive salary survey is cost-prohibitive for many business owners, and the magic formula simply doesn’t exist. Therefore, many managers/business owners/C-level executives “go with their gut” – simply pulling a number out of the sky – when determining what salary to pay for new or open positions.

There are definite disadvantages to doing this.  An arbitrary number will more than likely miss the mark.  Searching for the salesperson – the best that can be had –  but only offering  $40,000 and minimal benefits will cause you to either 1) have a job requisition remain open for months or 2) hire someone woefully inadequate.  Remember, at any level of compensation, you can get somebody to come and do the job, but is (s)he the best person for your company?

Getting the Best Information You Can With Limited Resources.

So what can you do?  Well, many think that the only way to get meaningful salary data is to conduct research involving thousands of workers.  This is not always the best use of limited resources.  Compensation information available online from Salary.com (and other websites) can give you a starting point – a benchmark pay range – in your efforts to determine suitable compensation.   However, be aware that these online templates are not your “magic formula”.  You need to spend some time really analyzing which one of the industries and job titles listed best matches your job characteristics.  As you all know, the designation of “manager” and “supervisor” can have very different meanings in different companies.

You can further refine this range by leveraging your networking skills and the knowledge of others.

  • Leverage your recruiter’s or staffing partner’s knowledge.  Many have placed other candidates into similar positions with similar organizations (in terms of size, product offering and location).  Their knowledge and experience can help you better flesh out that initial pay range.
  • Understand your market.  Living and working in a particular area can vary considerably (to say the least).  Affordable housing in San Francisco is (for many) almost impossible to find; therefore, in order to entice people to the area, companies pay a premium.  The same cannot be said for my backyard of Dallas which has a wide range of housing options.
  • Search across industries.  Leverage your network of contacts to find out what their compensation range is for comparable positions.  Remember, many positions are industry neutral.  The core selling skills of your $40,000-a-year salesperson will remain intact, regardless of what is sold.

With employee retention becoming a larger point of focus, ensuring that your employees are fairly and adequately paid in relationship to their peers can be cost effective on several fronts.  Primarily, you avoid overpaying an employee based on an arbitrary number, but also you reduce your costs to replace an employee – either through attrition or bad hiring decisions.

Remember, as the economy continues to improve, that $40,000-a-year salesperson will give notice once (s)he finds a similar job with better pay, maybe a bit of flexibility and a marginally better bonus or benefits structure.

So leverage your network.   Talk to as many people as you can…from your online connections to your vendors’ representatives, but remember that Snelling is here to help.  Placing a value on your open job requisitions is our business.   We have the needed expertise across a broad spectrum of industries, so you can trust us to provide the information, knowledge and guidance you need for consistent growth and profitability in 2013.

By David Allen, Snelling.com

NOTE:  A full-color, downloadable PDF is available.