How Is Pay/Salary/Compensation Determined?

My friend Amy Miller inspired me to write this article after I saw her video for candidate advocacy. I adore Amy, she is a good friend (we actually had dinner together recently!) and I often will build upon her insights.

In my career, I have worked with small companies, Fortune 50 employers, staffing agencies, and midsize organizations. I have a COMPREHENSIVE article on salary negotiation for job seekers – check it out.

There have been a lot of recent legal changes in the last five years regarding pay transparency in multiple cities/states in the US that is driving changes in how recruiters approach compensation, and at the start of most of those changes is the fact that employers CANNOT ask someone about their past pay history. This is critical legislation that does two things: it levels the playing field in general for job seekers, but it also puts the onus of understanding personal compensation on the job seeker. That means that you – as the person looking for a job - needs to understand what you are worth, and you need to do your homework. It is also important to understand that you are free to SHARE your current/past compensation to use as a benchmark; in fact, that makes our job a LOT easier if you tell us “I was making $85K base in my last role with a 20% bonus target which I hit for the last 2 years. I am looking for a total comp at least 15% higher than that” or “I am looking for total take home cash of at least $102K at the end of year, and a base of no less than $94K”. If you are an hourly employee, you can say “I’m looking for at least $22/hour.”

So let’s talk about how a job offer actually gets approved, and I will give examples of different processes I have seen at various companies in the next segment. The process starts before a job is actually posted.

At the start of every fiscal year for an employer, HR, finance and compensation go through a process called “headcount forecasting” for new jobs to be created (or – whether a reduction in force is needed). It is based on several factors (and the larger the organization, the more complex the process).

• The first step involves hiring managers submitting requests for X number of new jobs to be added to their teams. The request is based on the workload and capacity of the existing team in relation to their output for the business. This is what they THINK they need, it is not a guarantee of the actual approved roles they will be assigned.

• Finance and compensation look at factors across the employer such as revenue/profits, stock performance (for publicly traded companies), growth projections, industry performance, etc. to determine the people operating budget for the following year. This also includes promotions, bonuses, equity allocation (if part of compensation), etc.

• HR concurrently looks at several different factors in that team, that particular business organization, and across the company as a whole. They compile information based on the current salaries/pay of all employees that share the same TITLE and LEVEL across those areas (team/org/company). They will look at performance metrics of individual teams and separate business units. They may also consult with hiring managers/leadership on general job descriptions to make sure that they are updated.

• This report is then shared with compensation and finance teams. Compensation Analysts then create/update pay bands based on internal data and external sources called salary surveys, inflation, cost of living changes, and market movement, and the overall performance metrics by the members of each team/organization. 

• Pay bands are segmented by internal levels – which are generally set by HR and hiring team leadership across the employer. This also includes internal career ladders identifying what is needed to move from one level to the next. It is based on hitting specific milestones in each discipline. EVERY EMPLOYER SETS THEIR OWN LEVELING CRITERIA – THERE ARE NO SPECIFIC STANDARDS outside of entry level, which is right out of school for the first year to two years. *Moving beyond “entry level” may take longer based on the complexity of a specific job category in terms of needed skills/education.

• Once pay bands are set and approved, once the budget is defined, hiring managers are given two things: a total hiring budget for the year for net new heads, and pre-approval to open their requested headcount. Finance generally only cares about the total budget spent, and that approved headcount may have contingencies such as the quarter in which it is approved to be opened.

•  New budget is added on top of existing budget, which should be updated to reflect the same factors that went into determining NEW salary bands (and this is where raises, bonuses, and promotions come into play.)

All of this happens before recruiting is actually brought into the picture. These bands are shared with hiring managers, recruiters, and HR. There is generally a built in attrition % (based on historical data) which can also impact an individual team’s hiring budget, but *usually not the overall salary bands.

As new roles are opened, and recruiters and hiring managers start moving forward with hiring, the salary bands become a guideline when it comes to actually making offers. I already have a fairly extensive article on the interview process (which overlaps this information). 

*National or global trends can effect this - such as "The Great Reshuffle", the war in Ukraine, global supply chain issues, political upheaval, etc.