December 6, 2010

Readers’ Forum: How much should I pay a new hire?

Filed under: For Managers, Readers' Forum, The job offer

In the December 7, 2010 Ask The Headhunter Newsletter, an employer asks how to set the salary for a job offer.

I’m an employer, and I need some information on the average salary I should expect to pay an experienced (5-10 years), degreed individual to manage part of my software company. I am looking for someone who can take over and manage with little or no supervision. How do I set a salary on this?

Here’s the short version of my advice: (For the entire column, you need to subscribe to the free weekly newsletter. Don’t miss another edition!)

No salary database describes your position, or the particular manager you want to hire. You might find some data that appear to be relevant, but just one factor could throw off your entire calculus and lead you to make a terrible mistake.

I know that you need to set a range for your budget, but why not think about this person’s salary in a new way that might attract the best candidates? (Why would you want to focus on average salary? Do you want an average hire?)

Ask yourself, Is my hiring strategy to limit my costs, or to boost my profits? That is, are you willing to pay more to get more? This requires some analysis that few employers consider.

How much added profit could a candidate add to my business? In the interview, ask candidates to discuss their abilities in those terms. How would they increase your profits by 10%? Decrease your costs by 15%? Create products that increase market share by 20%?

Then, pay based on added profit.

(You say you can’t calculate profit for a particular position? Well, then your business plan is totally screwed. But don’t feel too badly — few employers have any idea how a single job contributes to profit. Think about that: How can anyone run a company rationally if they don’t know how each job contributes to the bottom line? My suspicion is that this problem is a fundamental cause of business failure.) 

A candidate who can answer those questions in a compelling way may be worth more than the market—or any salary survey—suggests. So, think out of the box. Turn your interviews into working meetings where you and the candidate roll up your sleeves and tackle ways to improve the job to make it more profitable.

This sort of interview turns into a business planning session…

(If you’re a job candidate, don’t let salary surveys limit your job negotiations, either.)

Maybe HR told you there’s $X in the budget for the job you want to fill. Maybe you checked the industry averages and set the salary range accordingly. Maybe you picked a number out of a hat.

Maybe you have no idea how the job is supposed to contribute to your bottom line!

Which is it? How do managers decide what salary to offer a new hire? Let’s talk dollars. How do you think they should do it?

.

36 Comments on “Readers’ Forum: How much should I pay a new hire?”
By A
December 6, 2010 at 11:29 pm

Nick, I’m curious how you’d approach salary at a nonprofit organization, where profit isn’t the point.

Or what about jobs at for-profit companies that by definition don’t contribute to the bottom line, like for instance someone in charge of coordinating the company’s philanthropic programs?

By Mayor Bongo
December 7, 2010 at 7:04 am

There is also an important lesson in Nick’s article for candidates. When it comes time to discuss compensation, ask the hiring manager “how much is this job worth to your company?”

For instance, in sales and consulting fields, a senior associate is expected to bring in X times base salary and business acquired beyond that level is tied to bonus.

In management jobs, the contribution to the bottom line has to be quantified in some way relative to revenue growth or cost control or more efficient business operations.

If the hiring manager is clueless about these issues, it should be seen as a red flag about how your work will be valued by the firm. It is not an opportunity to impose your idea of a “price” for your services on a pitiful, helpless hiring manager.

If you value what you do, and want to be valued for it, don’t go to work for a firm that doesn’t know how to put the two together in the best way possible.

By Nic
December 7, 2010 at 7:44 am

I have to say more and more I see that one should never discuss salary at all. It is a one on one issue. The employer should have a ‘range’ but that should be kept as quiet as should the potential employee’s salary past. This entire issue has in all honesty become a point of bullshit because the resume and the individual should do the talking and dictate the pricing from that point forward based against the actual needs of the organization. The problem is that today too many employers are looking to hire top talent at basic salary levels and that is where top talent bolts for the exit. Do they understand any of this? I am not sure.

By Erika
December 7, 2010 at 10:00 am

Nic, I agree and no, they don’t understand any of this. I have ALWAYS had potential employers want to base my salary on what my last job paid, even if it was in a completely different field with completely different responsibilities. I can’t take that BS and I find ways to earn for myself more and more. Who needs employers when you can have customers? I have always made my customers VERY happy! Oh… and they pay better too. It is too bad that more Americans can’t think like entrepreneurs. I blame that on the American educational system that blunts creativity and initiative and teaches conformity and what’s already been done before.

By Steve Amoia
December 7, 2010 at 10:22 am

This reminds me of a quote I once read about the American baseball legend, Babe Ruth. He was asked how he felt about earning more than the President of the United States:

“I had a better year.”

By Fast Eddie
December 7, 2010 at 11:42 am

First, Try to answer the question; What will it do to my business bottom line if I don’t fill this position? then ask what will it do to my bottom line if I fill this position? The rest can be done on a calculator.

By Volkswagen
December 7, 2010 at 12:44 pm

Nick,

In your note you write, “You say you can’t calculate profit for a particular position? Well, then your business plan is totally screwed.”

A few weeks ago one of your readers wrote that HR contributes nothing to the bottom line, and this comment went unchallenged on this blog.

Can you provide some reconcilliation for these two comments?

Also, “A” commented above about, “jobs . . . that by definition don’t contribute to the bottom line”.

By Nick Corcodilos
December 7, 2010 at 1:25 pm

@A: I think the moniker “non-profit” is silly. Unforunately, lots of people who work for “non-profits” believe they don’t have to worry about profit, and that’s just disastrous.

Every organization must produce profit. I’ll try to explain with something I learned from engineers long ago. Engineers talk about “inzes” and “outzes” and “black boxes.” Inzes are things you put IN to a system. Outzes are what you get OUT. The black box is the system that turns inzes into outzes.

The idea is that any system or organization must somehow transform, or add value to, the inzes. Otherwise, why would it be created?

So-called non-profits produce something of value – a service, a product, something that makes the world better. Thus, the black box creates some sort of value. Thus, there is “profit,” even if it’s not “more money.”

So I think that “the bottom line” is real and measureable, and it had better yield something more than what was put into that system. Anyone who doesn’t think about this when they do their work at a non-profit isn’t doing their job. At least in my opinion.

Profit is the universal goal that distinguishes systems that succeed from those that fail. In my opinion.

By Nick Corcodilos
December 7, 2010 at 1:30 pm

@Erika: Most of what I try to teach about job hunting and hiring is based on the consulting model. It’s up to the “consultant” to demonstrate how he or she is going to contribute to the “prospect’s” business, or the consultant does’t get hired.

Americans in general don’t think like entrepreneurs because they view the work they do as discrete – as long as they do it, they should get paid. Whether or not the outcome is profitable to the employer is someone else’s problem. Work and profit/outcome are separate.

And that’s one big (tho not the only) reason we have massive unemployment. Your employer is gonna lay you off? Go show her how you’re going to contribute to profitability if she keeps you on the job. Do that, and I think you won’t get laid off.

But few people take ownership of that obligation, largely because few employers bother to instill an awareness of how each worker’s work contributes to profit.

It’s pretty irresponsible.

By Nick Corcodilos
December 7, 2010 at 1:31 pm

@Fast Eddie: Nice job boiling down my column to two sentences! ;-)

Now let’s find one business that does what you suggested!

By Nick Corcodilos
December 7, 2010 at 1:35 pm

@Volkswagen: I welcome anyone from HR to challenge the statement that HR contributes nothing to the bottom line. If HR can’t show how it contributes to profit, then I think as an operation (and a company) it is indeed screwed. If this can’t be reconciled, then the very existence of HR comes into question.

See my comments to A, above. I think that any job that doesn’t contribute to the “bottom line” (however success is defined) should be eliminated. If someone misses it, then re-justify it and bring it back. (If a “non-profit” doesn’t produce something more than it requires to operate, then I question why it exists, too.)

By Volkswagen
December 7, 2010 at 1:58 pm

Well, of course, like you have said, there are many different measurements.

For example: A company hires a new recruiter with part of his/her responsibilities being to resource and bring in for hire delivery drivers.

After 2 years the transportation department records show that the number of delivery drivers with a clean driving record has been improved from 38% to 52%. Getting an immediate cost saving contribution is simple, one only has to compare the cost of the insurance premium, if inded it has been affected.

But there are so many issues related to this one factor that cannot be measured in dollars and cents, like the potential of a reduction in accidents and the enormous potential cost savings involved.

This is only one example of many that could be clearly attributable to the value of a good recruiter.

The good, conscientious HR department has saved
a company so much for the bottom line and it seems that a lot of this is focused in the areas of protection of assetts and operational costs in the areas of hiring, safety, etc. And
I am only focusing on part of what HR actually does. But, how does one put a cost/value on something that never happened when there is no actual “evidence” that it could have happened?

So, I say that anyone who categorically says that HR does not contribute to the bottom line is so over focused on other departments that his/her head is literally in the sand when making a statement like this.

By A.
December 7, 2010 at 3:40 pm

Nonprofits measure their results in impact rather than profit so if you’re trying to set salary for, for example, a community organizer or a lobbyist or a media director, of course you have to look at what value they add. But it’s not as simple as “pay based on added profit” like this post set out.

By Erika
December 7, 2010 at 8:52 pm

@Volkswagon,
Ok, here is how HR would quantify your example of lower accidents and insurance premiums. If there were 10 accidents on ave the year before the new safety training / requirements came into play, and an ave of 4 accidents afterwards, and the average cost of the accident was $10,000 then they saved (10-4)*$10,000 = $60,000. Simple!

By Jeff Wang
December 7, 2010 at 10:13 pm

I still don’t get it. I’ve been reading your blog for a long time, and I still don’t get how to apply this blog entry to me, or rather, my organization.

I run a software engineering shop. I’ve got 4 people, I’m trying to get authorization to expand to 10, because that’s what I believe can deliver the product. The problem is, if I do that, the company as a whole will be losing money for 2011.

I can probably calculate the cost of not having an engineering team vs having an adequately staffed one, but I’m at a loss on how to calculate the marginal cost of engineer #10 vs engineer #9. After all, my organization is a cost center, not a profit center, and it’s very hard to tell how much extra money feature X would bring the company.

By Nick Corcodilos
December 7, 2010 at 11:18 pm

@Jeff Wang: I didn’t suggest this was easy. But is it a worthy effort, to quantify the impacts of a job on the company’s business? I think so. I think this is a wildly ignored topic, simply because it’s difficult.

“it’s very hard to tell how much extra money feature X would bring the company.”

Yep. But if you can’t somehow quantify it, how can you justify it?

Try this: Outline what you THINK are the benefits of 6 more people. Characterize it any way you think is defensible. Talk to your boss about it. Go talk to the CFO about it, and ask for help measuring what you’re proposing. Remember: you’re all working together to improve the company’s prospects. The company might lose money in 2011, but adding staff might boost productivity by 2012. No one says you must do it all in a year. The point is to work through it, and to do this with other managers in the company.

So a programmer writes 1,000 lines of really good, reusable code. Follow this thread out for a year. What does it mean? Now, some of this kind of analysis can get silly, and I’m not suggesting making work through over-analysis. I’m not sure where the line is. It’s different everywhere. The point is to defend important choices in terms of what the company’s goals are, no?

By Nick Corcodilos
December 7, 2010 at 11:21 pm

@A: Why isn’t it simple? If results are measured in impact rather than profit, then impact=profit. How do you decide not to fire a worker? Is she contributing impact? If not, fire her. But how are you measuring that? There has to be a measure, or there is no judgment possible, and without judgment, you can’t make a successful organization. Pls stop thinking about profit. Go measure impact in ways you can defend. That’s profit. That’s a worker’s contribution. It cannot be zero impact, or you’ll fire them. Or “go out of business.” Non-profit though they are, such organizations DO go out of business!

By Nick Corcodilos
December 7, 2010 at 11:24 pm

@Volkswagen: You’re telling me the outcome of HR’s work cannot be measured?

Sometimes I think the statement, “We just can’t measure that!” means, “We have no idea why we’re doing that, but it feels good and we want to keep our jobs.”

Not good enough.

“But there are so many issues related to this one factor that cannot be measured in dollars and cents, like the potential of a reduction in accidents and the enormous potential cost savings involved.”

That’s pure HR-speak. You’re telling me something cannot be measured in dollars and cents, then you refer to the cost savings. Well, which is it?

I’m not trying to beat you up. I don’t think you realize the language you’re using to describe HR is shrouding the problem.

By A.
December 7, 2010 at 11:38 pm

Right, of course but how do you translate impact into salary? It’s easier when it’s profit that you’re looking at.

By Volkswagen
December 8, 2010 at 10:06 am

Nick,

After discussing this issue with a friend in HR we have come to a concensus that we sometimes speak/write in different languages.

Let me explain what I mean.

Operations people often speak about costs and profits in a reactive language that is measured by objective data.

HR people often speak about costs and profits in a proactive language that is based upon subjective or projected data.

When I said that something could not be measured I was speaking in the “operational” language.

The contribution by Erika, above is written in
the HR language and is based upon projected, not actual cost savings.

My interest here is simply to help us all understand that a good proactive HR department DOES contribute significantly to the bottom line of a company in ways that may not be considered or measured when only objective data is viewed.

I appreciate your comments, and all those who have participated in this discussion.

By Volkswagen
December 8, 2010 at 10:32 am

P.S. In my note above I was not even implying that operational people are never proactive. They are usually very good at this and that’s why they are successful.

To say that operational people are never proactive would be showing the same short sightedness as saying that HR never contributes to the bottom line.

By Nick Corcodilos
December 8, 2010 at 11:36 am

@Volkswagen: Now you’re scarin’ me.

“proactive HR department DOES contribute significantly to the bottom line of a company in ways that may not be considered or measured when only objective data is viewed.”

What I’m getting from this is that there’s a subjective (translation: mushy) set of metrics that no one really understands, but “just trust us.” Any time we have two or more people working together, and we want to assess the outcome of their work, there needs to be agreement on what to measure. And now we’re talking about objective measures.

In the social sciences, lots of research is conducted daily on “subjective” judgments that people make. But researchers come up with pretty rigorous objective metrics that are both reliable and valid.

I think that’s the direction HR needs to start taking, rather than dismissing metrics as “too operational for us.”

This is an important dialogue, VW. Thanks for starting it. I’m glad to see people thinking about the problem of measuring the quality and value of work. There are no easy answers, but I think it’s dangerous to fall back on blurry terminology.

By Volkswagen
December 8, 2010 at 2:37 pm

Nick,

“dismissing metrics as ‘too operational for us . . .’ ”

Aren’t you trying to put words in my mouth here? I never said that.

” . . . blurry terminology . . .” ? ? ?

By JaneA
December 8, 2010 at 5:13 pm

As I see it, people put a monetary value on “mushy stuff” every day. Any time we buy something that doesn’t have a hard and fast ROI, we do it.

Example: Why would I buy a sports car instead of a plain get-you-from-A-to-B model? Because something about the image of the sports car appeals to me. It will improve my status, make me feel younger or whatever.

But I won’t pay just any old price for it. There will be a limit. I might pay $15,000 additional (New Zealand), but $30,000 would seem too much for what really amounts to vanity if I’m honest with myself.

However, if I’m in business, the additional $30,000 might contribute to the sort of image where I can justify charging a lot more for my services. That may make the purchase worth while, and a good car salesperson will make that clear to me.

On a completely different topic, there are folk who decide that they need better work/life balance and who take a less stressful job at a lower salary. They may say that “you can’t put a dollar value on time with family”, but in fact they’ve decided that more family time is worth $X drop in salary. Would they go and work at the local fast food outlet? I’d say that most would say that this is too much of a financial sacrifice to make.

To the person talking about “impact” in a non-profit organisation, might that translate into higher levels of donations, pledges or whatever you call them?

Salespeople encourage prospects to put a monetary value on intangibles. Sounds like we should be doing what they do. Now where have I heard this before?

By A.
December 8, 2010 at 5:16 pm

“To the person talking about “impact” in a non-profit organisation, might that translate into higher levels of donations, pledges or whatever you call them?”

For some jobs yes, for some jobs no. Varies great by job and the type of nonprofit. I’d be really interested to hear Nick talk through a real-life example of how you can set salary based on impact on nonprofits, using specifics that don’t relate to obvious roles (like fundraising work). I think this argument is probably one that sounds good in theory, and feels good, but doesn’t work well in real life. But I’d love to be convinced so bring on the real-life examples!

By Karsten
December 9, 2010 at 5:21 am

Regarding the profit contribution of HR: Some HR work, like keeping track of payments and benefits may not contribute directly to profit, but it is an overhead cost, a “necessary evil” to keep a company organization going. Similarly, a company needs someone to do accounting and keeping books; it does not yield a direct profit, but the function is necessary to enable those people who do make the direct profit to do their job. People who maintain the buildings, working environment and the safety at a company have a somewhat similar function; safe and healthy employees work better than unhealthy ones. Furthermore, as humans, we have an obligation to not destroy people’s health, even if it had been more profitable to do so.

My problem with HR is that they often do things that are not “necessary evil” but UNnecessary evil, instituting lots of rules, meetings, policies, hiring bureaucracies. They become an obstacle to getting things done.

In my own organization, HR actually has contributed by helping selceting new hires whose personalities fit in, thus maintaining a good working environment. In that limited role, leaving the technical/business aspects of hiring to the technical/business managers, HR has a function. But far too often, HR acts not as such a partner, but as a gatekeeper that hijacks the whole organization and decides who can hire and how, regardless of the real needs. Then, HR becomes a profit destroyer. (Our department also has its fads, the last was to create a new document handling system which is supposed to be sooo smart. Not.)

I also think it is important, when trying to calculate a new employee’s contribution to not think only about the imediate profit, but the long term profit. Just as companies invest in R&D that may not pay out in many years.

Finally – I wonder if someone has ever calculated the profit contribution of management and consultants who spend time on Mission Statements, Vision Statements, Corporate Values and all that crap…that could really hurt some CEO’s fat bonuses…

By John Zabrenski
December 9, 2010 at 8:45 am

“Finally – I wonder if someone has ever calculated the profit contribution of management and consultants who spend time on Mission Statements, Vision Statements, Corporate Values and all that crap…that could really hurt some CEO’s fat bonuses…”

Karsten nailed that one.
I could have retired on 10% of what a former employer spent on management fads that didn’t produce any benifits except for the consultants.
With respect to HR, I always thought that they become a liability when they try to get too proactive and act as a gate keeper, salary cruncher and general PITA. It was mosly empire building to enhance the standing of the upper HR management without regard for the real effects it had on the business. My view of HR is that it is an expense that should be minimized unless it can show in unambiguous terms that it is helping with the bottom line.

By Karsten
December 9, 2010 at 9:37 am

Steve: You do realize that we understand that this is a sales pitch with no relationship to the topic discussed…?

By Nick Corcodilos
December 10, 2010 at 12:21 pm

@Karsten: I almost deleted Steve’s sales pitch, until I realized he’s offering resume editing for $19.95. That’s so funny, I couldn’t bring myself to delete it. I trust the intelligence of the folks on this forum. I’m still laughing.

By Nick Corcodilos
December 10, 2010 at 12:25 pm

@A: I’m not going to spend my time analyzing a non-profit organization’s management. But I think you can find good examples among those that go belly up every day. They were producing less value than it cost them to operate. But I’ll offer an exercise. Take an org like that which almost goes out of business, and there’s just one person left. (I know it’s hard to analyze the productivity of a group.) So the one person is running the operation. Anything and everything that person does affects the bottom line – that is, the success and survival of the organization. What are they doing, and how are they doing it? And what is the outcome of each action? There’s your analysis. I contend that any organization that isn’t doing that analysis for each and every jog and employer is operating in the dark.

By Nick Corcodilos
December 10, 2010 at 12:32 pm

@Karsten: You say: “Similarly, a company needs someone to do accounting and keeping books; it does not yield a direct profit, but the function is necessary to enable those people who do make the direct profit to do their job.”

Others say the same thing in other words, and I think this is very important to talk about.

I think most folks miss the point. Profit is not just about generating revenue. It has two components. Reduced to it essence, Profit=Revenue-Cost. Every single employee in an organization contributes to one of the two terms on the right side of that equation.

A person who has nothing to do with revenue directly affects profits. Watch: You do your work more efficiently so as to cost the company less many (you save one paperclip per day), and you lower Costs, which has a direct impact on Profit. You spend 2X as much time as necessary producing reports, so you have less time to do the rest of your job. Work either goes undone or someone else must be hired to pick up the slack. That raises Costs. That lowers Profit.

EVERYONE affects profit. But our culture promotes deflection of that responsibility. Too many people want to believe they get paid their salary to do the job they were given, but it’s some manager’s job to worry about profits.

And in the end, that turns out to be the case exactly. That manager lays you off because there’s too much cost in the equation and you contributed to it. Someone else decides for you.

My point is: Take responsibility NOW for your contribution to either increasing revenues or decreasing costs. Before someone does it for you.

By A.
December 10, 2010 at 12:35 pm

I just don’t see yet how this model works at nonprofits. I’d genuinely like to be convinced, I just haven’t heard yet how it works and so far what’s been said sounds reasonable in theory but seems to fall apart completely as soon as you try to apply it in practice. So if anyone can explain, I’d love to hear!

By Andreas
December 10, 2010 at 3:21 pm

“And in the end, that turns out to be the case exactly. That manager lays you off because there’s too much cost in the equation and you contributed to it. Someone else decides for you.”

Alas, the employees that are more costly are not necessarily the ones that actually get laid off, especially the bigger a company is.

By Steve Amoia
December 10, 2010 at 4:31 pm

Nick C. said: “EVERYONE affects profit. But our culture promotes deflection of that responsibility. Too many people want to believe they get paid their salary to do the job they were given, but it’s some manager’s job to worry about profits.”

I worked for a few years at a software developer. They hired someone to do tech support who later displayed extraordinary teaching and training skills during in-house sessions. Becoming frustrated with phone tech support, the person asked to do more than their present job. One of the managers said, “You weren’t hired for that. We already have trainers.”

Sometimes, managers throw a wrench into the profit and loss equation. Corporate America is very fixed about job roles and titles. If we take a sports example, if you have a guy on the bench who comes in every night and outplays the starters who earn significantly more, are you going to keep him there because your initial evaluation of his worth versus your needs was incorrect?

By Bob
December 13, 2010 at 1:30 pm

@Nick C.
I was laid off from 2 companies because I was one of 2 people in a role. I was paid a higher salary; so I cost more. But I produced more (up to 4x more depending on the job we are talking about). I had pointed all this out in my evaluations. But I went and the person with the lesser salary stayed. I frankly, don’t blame myself because I had made my case and worked hard.

I completely agreee with your statement, ‘And in the end, that turns out to be the case exactly. That manager lays you off because there’s too much cost in the equation and you contributed to it. Someone else decides for you.’

I didn’t want someone else to decide for me, but life is sometimes unfair.

By Jonathon
December 18, 2010 at 6:40 pm

@A. I believe you are requesting Nick to give you a very straightforward, simple, and educated answer to a severely complex program in nonprofit executive pay structures. Hospitals and Higher Ed pay the most. Religion and human services orgs pay the least. Larger NPOs pay more than their smaller NPO peers. Also, pay varies on the reliance of groups on different revenue sources. And there is a challenge with nonprofit executive compensation as some organizations are fully funded by private support (donors who may be irritated by their monies funding salaries). There is also growing competition between for-profits and non-profits for skilled executives, as the corporate world is becoming more prominent in social service delivery.

There are so many different variables that factor into nonprofit executive compensation and the variability organizational size and activity makes compensation patterns very difficult to comprehend. Lawmakers and IRS are also working to crack down on nonprofits who pay excessive compensation. Be mindful that in the world of nonprofits that salary is determined individually on the characteristics and circumstances of a nonprofit.

In Nick’s defense, I do understand his point. @A., have you ever received an annual performance review at a nonprofit? If so, in that review, did your supervisor or HR depeartment ask you a series of questions? The purpose of the review is to give an employee (for-profit or non-profit) an opportunity to highlight contributions (profit) in the workplace to justify a salary increase. You want to make sure in that review that your executives note value-added worth and provide ample documentation to support a recommendation for a bonus, merit pay raise, or both.

My answer may sound all over the place but my general point is this. In nonprofit management, it really depends on the type, size, and activity within a given organization. The bottom line is to provide the best service possible with the resources available. It doesn’t do any good to overextend staff and management of an organization. A strong and effective board of directors has to be realistic and accountable for the resources that it can access. Now, reviewing services, staffing models, advocating with fund providers, and implementing a revitalized fundraising strategy is no easy task and it will not happen in a year.

Those are my two cents. Thanks, Nick, for your valuable opinions!

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