Compensation of New Hires - The Internal Equity Trap
For my latest blog installment, I decided to take on the topic of compensation for new hires, as this is an area I see a lot of business owners and hiring managers struggle with. I started off my first draft mentioning that entire books had been written on the subject, and then promptly headed down the road of writing my own novella as opposed to a brief posting. So I have backed up, started over, and am now going to release this in a short series over the coming weeks. Stand back and let the excitement just wash over you! Here we go – The Internal Equity Trap.
It happens all the time. Companies do their research (yay!, that was step one, and a topic for another blog), figure out what the pay range is for the position they are hiring for, and go out and find an awesome candidate. We will call her Susan. Salary negotiations begin in earnest with Susan. Her demands are within the range the company had in mind, but then, disaster strikes. Someone realizes that Susan will be making $5k a year more than Bob. And Bob has worked there for 15 years! Sure, Susan is exactly what we need, and she isn’t asking for anything above market value, but what about Bob?
At this point, one of three things can happen. One, the company decides it can’t move forward, breaks off negotiations, and ghosts Susan as opposed to making an offer. Not cool. They go back into the cycle of trying to find the “perfect” candidate, can’t find anyone at what they want to pay, and end up hiring someone on the cheap who simply lacks the skills they really needed. This almost never ends well. Second, the company lowballs Susan, who laughs out loud and walks away shaking her head, wondering why they wasted her time. In which case the cycle of not being able to hire the right candidate starts up again. Or the third option. The best option. Really, if you want your company to succeed, the only option – pay her market value.
Companies need to bring in talent to thrive. There is a reason that HR people talk about the “War for Talent.” Attracting and retaining good people is not easy. So when you have a shot at a skilled employee, companies need to go for it. And yes, very frequently market value for a person on the open market is going to be higher than what a long-term, loyal employee is currently making. But you simply can’t turn your back and not hire what you need to succeed because of an equity issue. Make the offer at the market value and move forward.
But what about Bob? That is an excellent question. Don’t think for a second that Bob won’t find out that Susan is making more on day one than he is. That stuff goes viral inside a company, especially a small one. Bob is going to be ticked, so you better be ready to take care of Bob too. Because believe me, Bob has already known for a long time that his pay hasn’t been keeping up with the open market, and he has probably already started looking around, even before Susan got hired. So yes, pay Bob too. You were in all likelihood going to have him walking out the door due to salary issues even without the pay equity problem.
Companies need to know what their compensation strategy is, and then stick to it. Not everyone can be the market leader when it comes to pay. And there are certainly many, many factors beyond base compensation when it comes to attracting and retaining people. But if you are not willing or able to keep pace with the market, your organization is in serious trouble. So pay your candidates market value, and address pay equity issues as they come up. Your company will be better for it.