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How Much Should I be Paying My People? | Morgan McKinley

How Much Should I be Paying My People?

Written by Ruby Yeats
Mar 16, 2018
Submitted by Ruby Yeats on Fri, 03/16/2018 - 05:35

Cash is king - but what about the rest of the royal family?

The salary package is a an obvious factor considered by candidates when searching for a new position. The prospect of taking a major pay cut is unpalatable to most, both because of the reduction of money coming into a bank account, but also because salary range tends to be indicative of the level of seniority of a role, and nobody wants to take a step backwards in this regard.

But for surprisingly few candidates is salary package the deciding factor in making this decision - in fact, in my experience, only around 20% of candidates are motivated primarily by a pay rise.

It is still crucial for an employer to be paying fair wages. Not only will it make your business more attractive to potential candidates, it will increase employee retention over time, and - contrary to popular logic, offering lower employee salaries could actually cost the business more money in the long run. 

How?

Consider overall cost of employment:

  • Company A pays an employee $100,000 per year, below what she thinks she is worth (and what the market is paying) and - surprise surprise! - she moves on from the role after 18 months.
     
  • Company B pays the same employee $110,000 to start, with a $10,000 bump at the end of year one, and - wouldn’t you know it - she remains there for three years. 

Company A “saves” just $20,000 over two years on reduced salary levels - which won’t even cover the recruitment cost of replacing said role, not to mention all the intangible or difficult-to-measure costs associated with a vacant position, such as productivity loss!

Add to this the reputation that Company A gets in the market for paying poorly, and suddenly Company A is struggling to attract top talent - and has a serious branding problem.

Now that you’re convinced that you need to pay your people well, and save your business money in the long run,  the next question - how do you know how to set the salary level? What factors are important in calculating this number?

Here’s a comprehensive list, compiled from many years of wisdom watching businesses variably fail, or succeed, in this area:

Market rate

No brainer. The compensation paid by one business will unavoidably be compared to that of a similar role type in a similar organisation. Websites like Glassdoor and Emolument or Payscale provide transparency across thousands of businesses, providing data around average salaries - and many candidates use these data sources as part of the due diligence on a business.

In order to attract top market talent, and keep current employees, your business should at least align with market expectations. The websites referenced above are a great source of information here, as is your recruiter - a good recruiter should have a deep enough knowledge of his/her space to tell you whether the package you propose is a fair one, and justify this with reference to his/her other clients!

Working hours

One of the most commonly cited sources of employment distress come from a lack of work-life balance.

In strategy recruitment, we have regular conversations around “cost per hour” - $20k may seem a lot to sacrifice on the salary front in accepting a new role, but if the new position requires 10 fewer hours in the office per week, then you’re essentially valuing your time at $38.46 per hour - does this sound right?

If you expect premium hours from employees, you’ve got to pay a premium. 

Progression and review points

Starting salary is just the tip of the iceberg - literally. The case study outlined at the beginning of this article demonstrates that regular career progression points, and coinciding salary reviews, are just as important as offering a good package to start off with. 

If there will be a review at the six or 12 month mark, this is important information for a prospective employee - entering at the bottom of the salary band, with the ability to progress upwards, might make a candidate feel more comfortable accepting a slightly lower number in the first instance. 

Other tangible benefits

Google’s free food is legendary - and it’s worth a lot more than novelty value. In fact, the free breakfast (plus lunch and dinner) can add up to around $10k of untaxed ‘income’ every year. A $30-per-week gym membership, provided free by an employer, can result in $1,500 of extra income per year in the pocket of an incoming employee. Discounted health insurance? Novated leases? Friday night open bar in the office? All of these benefits can be bundled with formal wages to form the basis of a compelling salary package.

Company budget

The final piece of the puzzle, in assessing how much to pay an employee, if the simplest - how much can you afford? It’s so often heard that a candidate is exceptional, but the budget for the role simply isn’t there.

If a candidate knows the genuine reason behind the salary on offer - being that it is all the company can afford - a lower salary won’t import the same negative connotations (e.g. feeling undervalued, that the role is too junior, etc.)

A lot of information to process for one person!

If you’re interested in benchmarking your team’s salary, download Morgan McKinley’s Salary Guides - or for a more comprehensive discussion, reach out to one of our knowledgeable recruiters.

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