Determining an employee’s salary is a complex process that involves multiple factors. At a high level, an employee’s salary is a result of supply and demand, company pay strategy, job responsibilities, experience, performance, and negotiations. While many parties influence salary levels, ultimately it is up to the employer to set and approve employee pay.
What Factors Determine an Employee’s Salary?
There are a number of factors that determine how much an employee is paid. These include:
- Supply and Demand – If there are more qualified candidates than open positions for a certain role, companies can offer lower salaries. If there is a shortage of skilled talent, salaries will need to be higher to attract employees.
- Company Pay Strategy – Employers develop compensation philosophies and pay ranges for positions based on what they value and what they can afford.
- Job Responsibilities – Positions with more leadership, skills, experience, and education required will generally have higher salary ranges.
- Candidate Experience – The years of experience a candidate has, relevance of their experience, and mastery of required skills impact starting salary offers.
- Candidate Performance – Strong performance reviews and accomplishments demonstrate candidate value to command higher salary.
- Location – Salaries and cost of living vary significantly between geographic regions. Location must be considered in setting pay.
- Negotiations – Existing employees can negotiate raises. Job candidates can negotiate starting salaries through the interview process.
While employees and the market influence pay, ultimately employers set salary ranges and offer amounts based on these factors and their business context.
Who Is Involved in Setting Pay?
There are several parties involved in determining what an employee is paid within an organization:
Compensation Team
Most medium and large organizations have dedicated compensation professionals and teams. They conduct market research, develop and maintain pay structures, create job offer guidelines, and support salary discussions. Base pay ranges are derived from compensation team strategies and benchmarks.
Hiring Manager
Individual hiring managers assess candidate background, skills, and experience to make a salary offer recommendation. Most hiring managers partner closely with HR and compensation to align offers to guidelines.
Senior Leadership
For senior or executive positions, the leadership team reviews pay recommendations and approves final offer amounts. They ensure salary offers align to company pay philosophy and talent strategy.
HR Business Partner
HR business partners work with hiring managers on pay discussions and job offers. They advise on company pay practices and ensure offers align to ranges. HR is responsible for pay equity and guiding managers.
Candidates
Candidates have the opportunity to negotiate salary during interviews and job offers. Their experience, skills, and current compensation impact starting offers. Existing employees can request raises through promotion, annual increase, or adjustment requests.
While multiple stakeholders provide input, ultimately company leadership and HR determine the salary that is offered to an employee or job candidate.
How is Pay Information Gathered to Set Salaries?
In order to set fair, competitive salaries, detailed pay information must be gathered. Some sources that compensation teams leverage include:
- Market Surveys – Industry salary surveys provide pay benchmarks by position, experience, and location.
- HRIS System Data – Reviewing actual pay data for current employees allows analysis of internal equity.
- Offer Data – Tracking historical offer details and candidate salaries enables development of guidelines.
- Performance Data – Employee performance impacts raises over time.
- Budget – Business financials determine the budget available for merit increases and promotions each year.
- Job Descriptions – Detailed job descriptions allow proper job matching to surveys and internal jobs.
- Cost of Labor – Understanding role value output helps prioritize budgets.
This data is synthesized to create a competitive and equitable pay structure aligned to business goals.
Common Compensation Team Responsibilities
Some typical responsibilities of compensation professionals and teams include:
- Researching market data and industry salary surveys
- Analyzing pay trends and cost of labor metrics
- Developing and updating salary structure ranges
- Setting pay grades and bands for positions
- Creating job architecture to group similar roles
- Establishing compensation philosophy and strategies
- Modeling pay changes to meet budgets
- Providing tools and training for managers on pay guidelines
- Partnering with HR on offer letters and job changes
- Reporting to executives on pay analysis and planning
- Ensuring pay equity across employees
- Guiding one-off complex compensation scenarios
By leveraging market data, analytics, and stakeholder input, compensation teams create equitable pay guidelines aligned to business needs.
When Are Salaries Typically Evaluated?
Pay is evaluated on an ongoing basis at both the employee and overall company level. Common salary review times include:
- Annual Merit Increases – Budget is allocated for employee raises based on performance.
- Promotions – Pay is increased when an employee takes on more responsibility.
- New Hires – Pay is set based on the new role and candidate background.
- Incentive Payouts – Awards like bonuses and stock are tied to performance.
- Market Adjustments – Individual salaries may be adjusted based on market data.
- Structure Adjustments – Ranges for grades may shift based on benchmarks.
- Acquisition/Growth – Pay levels are aligned when new groups join the company.
- Turnover Trends – High turnover may indicate pay is not competitive.
- Budget Planning – Future salary increase budget is set annually.
Both individual employee pay and overall pay structure are reviewed on a regular basis to maintain internal and external competitiveness.
Pay Transparency Laws
Traditionally, employee pay has been confidential. However, some jurisdictions have enacted laws around pay transparency:
- Colorado Equal Pay for Equal Work Act – Requires employers to disclose compensation ranges to candidates upon request after making an offer.
- California Pay Data Report – Companies with 100+ employees must submit extensive compensation data to the state annually.
- New York City – Employers are banned from asking candidates about their salary history during hiring.
While not universal, these laws aim to improve pay equity through transparency. Even where not required, some firms openly share salary ranges.
Key Factors in Setting Pay Ranges
When developing a salary structure, key factors must be balanced by compensation professionals:
- External competitiveness – Pay must align to market rates to attract and retain talent.
- Internal equity – Employees expect pay to be fair relative to peers based on role and experience.
- Company affordability – Overall pay spend impacts company financials so budgets must be managed.
- Candidate demand – For hard to fill roles, pay may need to be above market to attract talent.
- Retention – Increasing pay through raises and incentives rewards and retains performers.
- Location – Pay is adjusted to account for cost of labor in different geographies.
Balancing these elements allows employers to pay competitively while managing costs.
Typical Salary Increase Budgets
For planning purposes, many companies target annual merit increase budgets. Some common standards are:
| Performance Rating | Salary Increase Budget |
|---|---|
| Exceeds Expectations | 4% – 5% |
| Meets Expectations | 3% – 4% |
| Below Expectations | 0% – 2% |
Actual increase percentages are dependent on company performance, market outlook, and budget availability each year.
Steps in Offering a Job Candidate a Salary
When extending a job offer to a candidate, several steps are typical:
- HR provides hiring manager the pay range for the open position based on market data.
- Hiring manager considers where the candidate falls in the range based on experience.
- HR advises on appropriate offer based on skills, background, and company precedent.
- Verbal offer is extended to candidate with proposed base pay.
- Candidate has opportunity to respond or negotiate salary offer.
- Revised verbal offer or written offer letter is provided with final agreed base pay.
- Offer is accepted and new employee onboarding begins.
Communication between HR, hiring managers, and candidates results in agreed upon salary offers.
Market Survey Sources for Salary Benchmarking
Professional compensation teams leverage a variety of reputable market surveys. Some leading providers include:
- Radford
- Aon Hewitt
- Willis Towers Watson
- Mercer
- WorldatWork
- Equilar
- Gallagher
Surveys are compiled based on actual participant salary data submissions. Many focus on specific industries or geographies. Companies purchase access to surveys to inform pay decisions.
Legal Considerations in Compensation
There are a number of laws governing employee pay that must be considered:
- Equal Pay Act – Requires men and women to be paid equally for equal work.
- FLSA – Defines compensation requirements like minimum wage and overtime.
- Comparable Worth – States employers must pay equivalent salaries for positions requiring comparable skill levels, effort, and responsibility.
HR and compensation teams partner closely with legal counsel to ensure pay practices meet all applicable legal standards.
Improving Salary Transparency
To continue improving pay equity and transparency, companies can:
- Proactively share salary ranges with candidates.
- Train hiring managers on equitable pay practices.
- Complete regular internal pay audits.
- Review market survey data at least annually.
- Analyze performance ratings and salaries to ensure alignment.
- Report pay ratio between executives and median employees.
- Standardize practices for salary reviews and increases.
While compensation will always involve some level of confidentiality, employers can take steps to improve openness.
Key Takeaways
- Many factors like market demand, responsibilities, and skills influence salary levels.
- Compensation professionals use market data, internal jobs, and budgets to build pay structures.
- Hiring managers, HR, senior leaders, and candidates all provide input on pay.
- Salary increases are tied to performance, promotion, and market adjustments.
- Employers balance external competitiveness with internal equity and business affordability.
- Standard annual increase budgets range from 0% to 5% based on performance.
- Compensation practices must comply with equal pay, FLSA, and other regulations.
- Improved pay transparency and training help build equitable pay practices.
Determining the right compensation for roles is a complex process with many considerations. Strong pay strategies are critical for attracting top talent, controlling costs, and keeping great employees engaged.