If you work in a small organization, many of your new hires are one-of-a-kind. They are your only HR person, or your only IT manager, or your only Development Officer. So when it’s time to hire someone new, you are often unfamiliar with what to pay, or what the “going rate” is for those skills. And there is nothing wrong with not knowing. Not knowing is actually a good thing – you can be more open minded.
But sadly, many people are really uncomfortable with that uncertainty. Perhaps they need to budget for a position, or justify it to their boss. Perhaps they are the boss and they feel like they must dictate salary to control costs. So in order to feel more certain, hiring managers turn to salary surveys, or worse, they ask a few other small firms what they are paying, or even worse they assume they can pay what their last employee earned in that position (like the one who failed, or the one who quit). But worst of all are the people who ignore the reality of the job market entirely and say “I budgeted $60,000, so let’s get the best possible person we can for that amount.”
All of these are bad ideas. OK, some of these are really bad ideas. They all force you into hiring to fit the (arbitrarily determined) budget, instead of hiring the right people to fit the job, and then figuring out how to make the budget work. Like the aspiring young snorkeler in the picture, hiring to fit the budget is a bass-ackwards hiring practice. Here’s why:
The purpose of a budget is to control costs and allocate resources to the proper strategic priorities. High performing people are a great bargain, it’s the underperformers who are expensive. When you limit your interviewing to consider only those people who fit your budget, who do you think you are most likely to exclude? The high performers. And who are you most likely to include? The underperformers. Funny how that whole cost control thing can backfire on you and undermine your strategic priorities.
Salary surveys tell you what some small sample size of average people in that job title get paid – as if everyone with the same title has precisely the skills you need…absurd. The same problems occur when you ask around. If all you ask is “What do you pay your IT Manager?” the answer is always meaningless. But it’s worse than meaningless, because you probably felt like you just learned something when in reality, you really did not.
Admittedly, it’s no easy task to keep salaries equitable for your employees. And overpaying new hires can be demoralizing to loyal current employees. And yet, and yet, and yet…when you are hiring for a critical position and are not sure what to pay, you owe it to yourself go about it in this order:
- First, decide what skills and abilities you need to achieve the results you want to achieve.
- Second, go recruit people who have all those skills and abilities and want to work at your organization.
- Third, interview people across the spectrum of skills, experience and salary levels. If you recruit a robust candidate pool, you will almost always find a “sweet spot” – a salary level where most of the good people tend to cluster. If the best qualified people are clustered around $120 – 130k, but your salary budget is $115, you really owe it to yourself to understand this before proceeding. When you ignore this market reality and hire the people who fit the budget instead of hiring people who fit the job you will end up spending far more on turnover than you save on budget. Lower performers also consume more training and management time, and are less productive, hardly a bargain for your budget.
- Fourth, having looked at people with a wide range of skills, decide what level of skill is worth paying for to achieve the business results you require.
- Fifth, find the money to make them a job offer at a fair market rate. Don’t lowball your job offers to fit budget – if you want to keep great people, pay fairly.
- Sixth, if in the search process you learned that the current market rate is higher than what you pay your other people, either bring their salaries up to market, or plan for more turnover.
Great people who drive business results are always worth what you pay them.
We have updated salary guidance in light of trends toward salary transparency in 2023. Please see: