The forces that affect salaries for existing employees within a business are not exactly the same as those that affect starting salaries.
With existing staff, you have a better understanding of people’s abilities, contribution and abilities. You can more easily compare them to their peers and have the benefit of the framework that you have created over time – your culture, working environment, job satisfaction, and the relationships that they have created with their colleagues and managers.
The desire to ensure that your employees’ financial, intellectual and career needs are met is stronger because you want to ensure that they are looked after and therefore emotion plays a far larger role in any decision.
For starting salaries however, there are four primary forces that influence any hiring manager / business owner’s decision.
The role that is being recruited has a preordained salary range. This may be a matter of policy that is open to all or it could be just in the hiring manager’s head. Either way, there is a comfort zone for starting salary that is set by the position.
Often, the salary range for a specific position will qualify candidates in or out of the recruitment process in the early stages of this process. Outliers however, may still be invited if they possess specific qualities – e.g. low salary expectations but considerable experience or higher than usual salary expectations and significant employment history, track record or achievements.
The financial conditions of the business will also influence starting salaries in two ways.
First, if the company is having cash flow issues or other sorts of “physical” financial constraints (available money) then this will impact which shift the decision significantly. Tighter financial conditions results in the preselection of candidates that are in the low end of the salary range for any position.
The opposite can also be true. In times of great financial success, many companies will shift and often exceed their range structure in order to get the right candidate. This has been the Silicon Valley model for some time.
The second type of financial factor is most appropriate in professional service organisations – where their service is built on offering employee expertise to clients for a fee. In these cases, the gross margin for the role becomes a factor.
Just as a product-based business needs to price their products above the cost of production, all service companies need to ensure that they are charging a multiple of an employee’s gross costs. The typical multiple varies and usually starts from 2.8x depending on overheads and local costs variations (office space, taxes, etc).
This means that the rate that a company charges its customers will dictate the top range of any salary offer. For example, if the typical rate to a customer is for a specific role is $75 per hour, then the maximum gross salary that could be deemed “affordable” is $42,500 per year (based on $75 x 2,000 working hours per year x 85% utilisation ÷ a factor of 3).
Often, the standard economic forces of supply and demand come in to play with recruiting and setting a starting salary. If there are very few suitable candidates available for a position, then this will naturally push rates up. Conversely, if it is effectively a “buyers market” then the starting salary may not go down but it won’t go up either; plus there will be more scrutiny of other selection criteria (experience, cultural fit, etc).
This availability dynamic is in constant flux. There are times when I have been recruiting for a position and was overwhelmed by the number of excellent candidates available. Then, just a few months later when recruiting for the same position, nothing.
The lesson for hiring managers is to cultivate relationships with excellent candidates before you need to recruit for a position. That way, you are able to fill positions independent of the supply of “job seekers”.
The final factor is the “X Factor”. Sometimes you meet someone when you are recruiting that you know will have a big impact on your business. You know that they can handle the currently open vacancy, but you also know that they can handle any role and any future role.
These people are rare and become a force multiplier when in the right position at the right company. This means that all other factors are typically ignored. You are not hiring for the position but for the person and so the salary range is irrelevant. These people are more of an investment and so the standard financial factors do not come in to play. And finally, these people are so rare that they take the availability model influence to the end of any spectrum.
It’s sometimes confusing for existing employees to understand why a new hire may have a different starting salary than they do – for what may seem to be the same role; but they should try to understand the different forces that are in play with these sorts of decisions. The fact is that salary levels will equalise over time all things remaining equal – its all a factor of hiring economics.