Determining Compensation: How Much Should I Pay for My Open Position?

This blog was originally published on February 13th, 2020 but has been updated on February 14, 2024.

You have an open position and you’re almost ready to start the hiring process, but deciding on compensation for the role has you stuck. 

If this is you, you’ve come to the right place.

Figuring out how much to pay a new employee can be complex. It’s important to define a pay range for your open position, whether it’s a set hourly rate or a broad annual salary range. Including a compensation range in your job advertisements is required in many areas. Plus, it helps drive traffic to your position and directs which candidates will express interest in, apply for, and interview for the role. 

After clearly defining the position, careful consideration of compensation is the second foundational step toward a successful hire. Here are a few things to think about when determining compensation for your next hire.

A Fine Balance: Internal Equity vs Market Pressure 

If you haven’t hired for a while, take a deep breath. Salaries have risen, and substantially so. It may take more — a lot more — than you may have anticipated to get that highly skilled, amazing new hire you’re dreaming of to even consider your opportunity. 

Not only will that highly qualified person cost you more than you expect, but you may also need to review the compensation of your existing employees in similar roles. Employees talk, and there are rules against preventing employees from sharing their pay details with one another. 

If you end up paying more for a new hire than you’re paying for your loyal and seasoned team members, expect internal pushback from your existing ranks. Or worse: unhappy employees could decide to look elsewhere for a salary that’s closer to market rates.

This is why internal equity is so important in a workplace. 

Internal equity refers to offering equal compensation (including salary, bonuses, expense accounts, and other benefits) to employees with similar positions or skill sets. Ensuring that you are providing similar pay to employees doing similar jobs doesn’t just help keep employees happy, it’s also a legal mandate. The Federal Equal Pay Act of 1963 clearly prohibits gender-based discrimination between men and women working in the same organization in positions that require a "similar skill level, effort, or responsibility."

The Compensation “Sweet Spot”

When it comes to determining compensation for your open position, you can set any salary amount you want. But in the end, either the market or the candidates themselves will tell you what the position is worth. To attract and retain the best employees, you need to pay competitive salaries.

The “sweet spot” for compensation will be different for every position, but you’re ultimately looking for a compensation package that attracts skilled applicants (i.e., is consistent with market rates) and is equitable for all employees (current and potential) in similar positions.

That said, if market rates are far above what you can offer, you have a couple of options:

1. Recognize it may take a really long time to fill the position.

or 

2. Lower your expectations for the role, which can include reducing the scope of the position or lowering the rank of the job title.

How To Determine Compensation

When determining compensation for your open position, you’ll need to weigh market rates and employee compensation expectations against your budget and the value you receive from the work.

In this very competitive job market, it often takes a 10-20% increase in compensation to lure an employee away from their current position.

But when it comes to determining candidate expectations for salary amounts, keep in mind that in Minnesota (and other states, cities, and municipalities), salary bans may affect how you approach compensation conversations. In many cases, it is no longer permitted to ask a candidate about or even consider their pay history when deciding on compensation. 

Instead, you’ll need to do some market research to see what compensation other companies are offering and how much employees in similar positions are earning. There are a number of online resources available where you can search for salary information, including websites like Indeed, Glassdoor, Salary.com, and Payscale.com. Do your research thoroughly by employing a compensation analyst, subscribing to a reputable vendor, and/or looking at multiple resources. 

Researching job sites like Indeed and Glassdoor will give you insight into what hourly rate or annual compensation employers are offering for similar positions. Salary sites like Salary.com or Payscale.com publish data that reflects what employees are earning and provide more detailed compensation information to help you create salary bands across your organization. (Note that some of these sites may require a paid subscription to access their data.)

When pricing a position, review multiple relevant job titles as well. Different job titles may greatly affect expected compensation. Alternatively, your company may benefit from the services of a Compensation Consultant that specializes in and has access to data to build a position compensation plan or a company-wide compensation strategy for your business.  

A Word on Pay Negotiation

Many companies take it as a personal affront when candidates negotiate for higher pay or more benefits. But the reality is, when you read advice for job applicants online, they are almost universally encouraged to negotiate.

When an applicant wants to negotiate, they aren’t speaking out of turn or showing disrespect for you or the position. They’re simply following the advice they’ve been given to get the pay they feel is right for the job. Plus, employee satisfaction results in higher productivity and lower turnover, and starting an employee at a compensation level they are happy with is a foundational part of starting off on the right foot.

A practice we find helpful when we anticipate pay negotiations is to thoroughly re-review candidate expectations shortly before presenting an offer. In addition to clarifying expectations for base compensation, a thorough review of the candidate’s requirements for bonus opportunities, health care coverage and costs, and retirement plans are key factors that may change how a successful offer is structured.

The Small Business Factor and Market Rate

When you run a small business, it can be difficult to offer compensation and benefits that are competitive with that of much larger corporations. And while smaller employers typically offer unique perks such as more flexibility and opportunities to work on a broader range of projects, it’s important for small businesses to keep market pay rates in mind to remain competitive.

With the rise of online resources where market rate salary data is easily accessible, prospective employees are well-educated on what competitive compensation looks like for their skill set and experience. 

In this employee-driven environment, we find that while prospective employees take flexibility and other perks into consideration in evaluating an offer, they’re typically asking for and expecting to be paid market rate for their skills, regardless of company size.

Need More Tips for Filling Your Open Position? Red Seat Can Help

We can’t stress enough the importance of understanding market salary demands in creating a competitive compensation package that will attract the top talent you seek.  

If you have more questions about setting compensation for your job openings, the team at Red Seat can help. We can research market resources for you and are often able to pull data from related positions we’ve recently filled. Or, if you’re interested in connecting with a Compensation Consultant, we’re happy to refer you to a specialist vendor to price a position or assist you in building a company-wide compensation plan.  

Contact us with your questions or to discuss your needs for your next hire.

Hiring Bonus: What’s Good for the Employee Should Also Be Good for the Company

To offer a hiring bonus, or not to offer a hiring bonus: this is the question.

For some industries, hiring or sign-on bonuses are common; for others, they are less so. And in some cases, it depends entirely on the position.

If you do choose to offer a bonus for your open position, it’s important to make sure it’s both enticing to the prospective employee and beneficial for your company. Let’s look at some cases where a sign-on bonus makes sense, as well as some tips for creating bonuses that are mutually beneficial.

Why Offer a Hiring Bonus?

A sign-on bonus can be a valuable addition to a compensation package in many instances. For example:

To attract candidates to an open position 

If you’re struggling to find candidates for your position, offering a bonus can make it more attractive. This is particularly effective if the candidate pool is small or if a bonus is not typically offered in your industry.  

To bridge the gap between expected base pay, earned commission, or anticipated bonuses

For example, say you have a candidate seeking total compensation of $150k, and your position is structured for a $100k base salary plus $50k in bonuses. However, because of your ramp-up time, the employee won't hit that amount until 6-12 months after they start. A sign-on bonus can help bridge that gap.

When you’re competing with another offer

If your ideal candidate is considering multiple job offers, a sign-on bonus can help entice them to take your position.

To compensate for something you don't offer

For example, if you don’t offer as much vacation time or other benefits as the competition, an up-front bonus can help make up the difference.

When you don't want to add to your ongoing salary expense 

A sign-on bonus is a good way to offer the compensation a prospective employee seeks without adding to the employee’s salary on an ongoing basis. 

To cover a waiting period

If the potential new employee will have to wait for benefits to kick in (like health insurance, for example), a sign-on bonus can make up the difference during that waiting period. 

To make up for something the candidate is giving up by coming to your company 

If the candidate will miss collecting on a bonus at their current job or take a cut in pay or benefits if they choose to take your open position, a bonus up front can help compensate for that loss.

Best Practices for Creating a Hiring Bonus 

Here are a few suggestions to help you create an effective sign-on bonus offering and avoid some common mistakes.

Prepare in advance

Determine specific terms for your bonus program, and stick to them. For example: decide if you’ll require a minimum time commitment within which the employee will have to pay back the bonus if they leave. Also determine when and how you’ll pay the bonus: in one large lump sum, or in smaller payments spread out over the first year, for instance.

Stay on budget

Calculate how much you can afford to offer within your hiring budget. While your bonus should be competitive, it also needs to be affordable.

Spread out the bonus over time

Pay the bonus in smaller installments over time. Spreading out the bonus helps limit your risk. For example, paying a $10k bonus up front can backfire if the person leaves two months into the job. By spreading the payments out over time, you’ll have less to lose if they decide to leave.

Keep installment payments to a reasonable timeframe

Carefully consider the time frame in which you’ll pay out the bonus. A year is a good benchmark. Much less than that, and you risk too much loss if the employee leaves; but if you spread it out longer than a year, the bonus loses its allure.

Offer a big enough bonus to make it attractive

There’s no set formula to determine the right amount for a bonus, but it should be commensurate with the position and large enough to draw candidates. For example, offering only $500 for a $100k position is far too little. The bonus offered should be dependent on the position, salary level, and how difficult it is to fill the particular job.

We hope these tips help you create a hiring bonus that attracts great candidates and suits your company’s needs and budget. 

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