Where Did That Number Come From?

How does a company decide how much to offer for a new hire or promotion? 

This is a question that I'm frequently asked; during my webinars, speaking engagements, and even on the street while sipping my Starbucks. 

Well okay, maybe not over coffee.  It just feels that way.

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You're interviewing for a position, whether a promotional opportunity or with a new employer, and prospects are looking good.  You feel that they're going to extend an offer. You know what salary you want, what you deserve, but you don't know whether the company sees your value in the same terms.  

When they do present an offer the salary may be a good figure, or it may not - but where did that number come from?   And could you have anticipated it?

The offer that a company extends doesn't drop from the sky like a brainstorm of intuitive thought.  Nor will it necessarily mirror what you think you deserve.  It does relate though to what the company feels is appropriate for their position, what they can afford to pay, and what amount fits within their internal pay structure.  If the figure is also the amount you desired, all the better for everyone.

Candidates often think that what they're offered has a direct connection to what they were making before, or what they asked for.  They would only be partially correct.

Coming up with the number

Every company has a decision-making process they follow as a guide in constructing an offer.  This process is applied to some extent for every candidate, no matter what final figure is ultimately used.

Firstly, the company will have either a hiring range or a projection of what they want to spend (what they paid the previous incumbent, pay rates of similar jobs, what's been budgeted, etc.).  Thus to the company their target job already has a value, so they can anticipate what they'll likely pay, even before they've met you.

So they have a number in mind.  Now you come along and seem like a strong candidate.  They'll need to know how your desired number compares with what they're prepared to offer.  Don't attempt to withhold your compensation history - or try to confuse the issue, as this tactic might explode in your face as the employer simply moves on without you.  And as they never like surprises once an offer has been made, any reluctance to explain your compensation history could be a huge red flag.

While hiring guidelines are usually set up for recruiters to follow, exceptions can and will be made, but they'll likely require some justification, some "selling."  Simply saying what you want, what you feel you deserve is something they hear every day - and won't make much of an impression.

Offer amounts can also be restricted by policy or precedent:

·         Starting salaries may not exceed salary range midpoints

·         A reluctance to offer too little or too much over previous compensation

Internal equity is also very important, and may dictate a company's degree of flexibility.  They can't afford to anger two employees in order to please one.

Taking a step back

Many candidates lose sight of the company's perspective, thinking of their own value in the marketplace - what they feel they deserve, given their background and experience.  For its part the company is trying to fill a job for which they already know the value.  That's what usually commands the offered salary, more so than what the candidate is necessarily worth in a universe of possibilities.

Consider a hospital seeking to hire a general practitioner, and a brain surgeon applies for the position.  The brain surgeon may well be worth the going rate for their skill set, but the company is hiring a different position, with a different (lower) value.  At this point they don't need to pay for the services of a brain surgeon.

What to do?  Ask about the hiring range, how much the company expects to pay for a qualified candidate.   They will have a number in mind.  Best you know up front in case there's a disconnect in valuing your services, lest you both waste your time.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

Creative Commons image courtesy of marco_1186

Comments

[Jules]

My favorite quote from my boss when dealing with stubborn managers was, "If we are hiring an admin and an ex-CEO got that position, what do you think we should pay him?"