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.