How is a Salary is Determined?

Posted: February 18, 2014 in Career

Years ago I found myself in a very sticky situation. The worst part; I understood why, but I still didn’t think it was right.

I was managing a small DBA group that had a total of 6 headcount. I was fortunate that I didn’t have a lot of turnover and honestly I was surprised because the company provided a less then optimal working environment. I had a position come open and I started the process of hiring a new DBA. After a number of interviews it was obvious there were a large number of candidates looking for work at that time. The person that I ended up extending an offer to, and employed was someone who in my mind is an ideal candidate, we will call him Bob. He didn’t disappoint at all.

A year later I was in the same situation, however when I started the interview process this time I determined there were very few candidates that I could draw from. I ended up finding someone who at the time I thought would be a good fit for the team we will call him John. I made the offer and John accepted. In the long run I don’t think the position was a good match for John but that is a different story for a different time. Now this is where things get a little crazy. Bob was hired at one rate let’s say $20.00 an hour, and John was hired at $25.00 an hour. Both of them were going for the same job description and received the same benefits yet the Salary was quite different.

The company I was working for didn’t let me determine the salary of an employee. The way it was determined was that I given a range of what I could afford in my department budget and I was often instructed to try to stay in the middle of that range. When I hired Bob the range was $15.00 to $22.00, yet when I hired John the range was $25.00 to $30.00 an hour. Here is where the questions started, and today many years later I have had the opportunity to discuss this in an interview format with different HR directors, the information posted here comes from 3 different interviews. None of the individuals wanted to be identified however I can tell you that:

  • One is from the government agency with near 200 employees
  • One is from a non-profit with near 500 employees
  • One is from a for profit company with well over 5000 employees

What surprised me the most is that no matter how different the hiring organizations are the answers are really not different in how they determine what salaries are offered to potential employees. I wanted to focus on three questions in particular; I have listed them here with a summary on how they were answered:

  1. How do companies determine a salary range when they are trying to fill open head count?

    The general answer here is a company makes a determination if they are going to pay at market rates often a decision is made to pay slightly higher or slightly lower than market. Once that decision is made they research the market and then determine the spread, the average is determined and then adjustments are made. When researching for the market variables such as cost of living allowances are taken into consideration (It costs more to live in Southern California then it does in Colorado). For example in Feb of 2014 a salary range for Colorado Springs, Colorado is shown below.


    The Median or average is $95k a year (National average was $107k) for a Data Architect 3 or a senior level data architect as explained in the description. Companies then make adjustments based on if they want to pay slightly above or below this average, as you can see 50% of the salaries fall between $83k and $107k. This chart was supplied by Salary.com. Other sources used to determine Salaries include:

  • Indeed.com
  • PayScale
  • Career Journal.com
  • JobStart.com

End result, I was not too surprised at what the decision makers were telling me. Granted I did find the 50% range from $83k to $107k a lot wider than I had anticipated.

  1. How does a non-profit organization such as a government organization or a religious organization determine a salary range?

    Now here is where I was surprised. To be honest I am not sure that my research had enough input points to be considered a set of valuable statistics. The answers I received pointed to using the same methodology as for-profit organizations. My experience when looking at these non-profits does not reflect that. My own opinion derived from discussions with people who are employed at non-profits or interviews with non-profits is they generally pay about 70% to 80% of average. Reflecting back to one specific discussion on salary while I was being interviewed for a position, a local religious non-profit explained the away the delta by discussing the benefits in the nature of the work itself (much could be debated on this).

  2. How much does a job title impact the salary range?

    One note about the question with titles, and this one may just be me and my experience. I have always argued that a title should reflect your job description accurately. At one point in my career I was told titles mean nothing, and my title would not be adjusted. I have found this is often a problem for a number of reasons. Many companies have a max salary for a job title, for example if you had a title of a Jr. DBA your ceiling or salary cap would be lower if you were a mid-level DBA. From a general view that makes a bit of since, if you were a Jr DBA before you can move to the next salary bracket you should display the skills of a more seasoned professional. This argument doesn’t hold much water in many situations. When I asked the questions to the panel the answer I received was very clear and uniformed. Title does matter, not only does that title matter but the tasks associated with it matter.

Remember Bob and John? In my situation Bob the employee that was making less money than the new hire found out that John was making more money than he was. I have to admit that was one of the hardest days at that role in the company. I had to have a discussion with Bob and explain the market had changed and that the amount of money other people were making was no reflection on him. As much as I understand why the fact remained that if I was Bob, and found out that someone who was just hired was making more than what I was all depending on the market when I was hired I would be a little sore as well.

I tried to do the right thing and bring Bob up to the level that John was making, even a little more. The end result was the damage was done.

 

 

 

Comments
  1. […] How Salary is Determined – Chris Shaw(Blog|Twitter) […]

  2. dd says:

    This is why people keep jumping jobs. You can find a better salary at a new company than at your existing company.

    • Chris Shaw says:

      Often that is the case.

      • anonymous (sorry) says:

        I was in a similar situation to Bob, in a job for nearly 10 years, after negotiation I was awarded half the difference with a promise that the full difference would be given at the next review. I didn’t wait a year, I left moving to a position with a 25% increase in wage along with a host of benefits and less hours!

        The point being, I would have stayed if fairly treated. I’m in a much better place now and I’m glad it all happened. I hope that the employer realize that they need to pay people what they are worth and that is made up, hopefully, of more than just what a new person would cost.

      • Chris Shaw says:

        In my own Opinion…. I think over the years, we have seen a big change in the way that many people act towards companies, and the way companies treat their people. With that being said, It is to bad that it had to come to leaving.

        Thanks for the read.
        Chris

  3. I’m in a similar boat – managing a small 6-person team. Salaries have been one of the hardest parts of the job.

  4. Bennett Rutledge says:

    “…someone who was just hired was making more than what I was all depending on the market when I was hired I would be a little sore as well.” You say? Don’t get mad, get even! Go back to the market and find an employer who’ll offer you a competitive salary. The whole reason the IT field is not unionized is supposed to be because we are competent (i.e. capable of competing effectively) professionals.

    I should mention, in the interests of full disclosure, that my background is in the consulting side of the industry, where finding a new job every year or two is business-as-usual.

    Everyone: keep your resume current and stand beside your colleagues who are subjected to bullying.

    • Chris Shaw says:

      That is one way to look at it for sure. I was just floored how I could not pay my people based on what they were really worth to the company.

      I however would hate to think that it would be 100% based on market rates, I could not imagine how difficult a pay cut discussion would be.

      Thanks for the read,
      Chris

  5. Marge says:

    It is against company policy to discuss your compensation with another employee. John should be fired. Bob should be fired also, if he let John know what he was making.

    • Chris Shaw says:

      Funny you mention it. Part of the issue that I did not really dive into with the post… all this came to light because someone left HR paperwork on their desk right into the open. A rough week for me for sure.

      Thanks for the read,
      Chris

    • John says:

      The only reason that companies have policies against talking about salary is to protect the institutionalized practice of unfair pay.

    • 1LT INF, ret says:

      That “zero-tolerance” approach has to be one of the most counter-productive managerial attitudes you could take. Would you also advise teachers to permanently expel children if they’re caught sharing answers on their homework?

      Good managers understand that applying motivational economics will create a much more productive workplace than Marge’s martinet approach.

    • Chris says:

      I must live in a bubble. I have never heard of a policy where I can’t discuss my salary with someone. Granted it is not common practice and I don’t do it, but I have never heard that I could be fired over it.

      • Chris Shaw says:

        Talking with a friend about it when he saw your comment. He mentioned that at IBM that one could be fired over sharing that information.

      • 1LT INF, ret says:

        It’s a common policy in contract shops — nobody wants competitors (or former employees) stirring up discontent with salary comparisons at a customer site. In other words, it’s a means of holding down employee turnover — I’ve seen some shops where the annual turnover exceeded 100 percent because of a shortage of personnel with the needed combinations of experience and security clearances, so you can’t blame the employer for trying to increase stability in those situations.

        That said, I probably would be long gone to another job if I found myself working for a management team that would fire me for such a trivial item — especially if you consider that turning down a job offer from another company by telling them that accepting their offer would be a pay cut.could be considered a violation of that policy (been there, said that, still got the old polo shirt).

        My own bottom line is that I have a pretty good sense of what my market value is as well as what unique/uncommon value I can offer a company, so I’m pretty confident that I could be warming up a new seat inside of 3 or 4 weeks if I get miffed enough at managerial incompetence.

  6. Mark says:

    Perfect reasons to bring back unionization.

    • 1LT INF, ret says:

      No, most of the “safeguards” that unions fight for tend to separate pay from productivity or profitability.

      Better for employees to treat management like a customer who needs a fair value for their money, and for management to treat employees as vendors who need a fair price for their services. If Bob provides better service, then Bob should be able to set a higher price. Lower-quality server means Walmart pricing.

  7. Sunil says:

    I just want to point out that Median does NOT mean average. Mean means average. Median is the number which represents the midpoint if you sort high to low. That can often be, and normally is, different than the average. The average skews left or right depending on the data.

  8. Jacob says:

    Does it surprise anyone else that “market rates” always seem to favor those hired most recently? I agree that people especially in IT seem to be constantly switching jobs, and finding those who’ve been at a company for 5+ years, and especially 10 or more years is becoming increasingly rare. It seems that often the reasons are compensation (salary) related, is it really cost effective for companies to hire someone new? I realize that sometimes it does allow bringing in a more junior or less experienced candidate and saving some money on salary, but the costs of hiring, lost productivity and a lot of times institutional knowledge seems to outweigh even a 25% bump in salary . Is it just that companies don’t want to set a precedent of giving in to people’s legitimate compensation requests?

    • Eric says:

      The “market rate” was very significantly down after the .com bubble burst, and during the “Great Recession”. Employees are eager to earn “market” when it is higher than when they are hired, but I have yet to experience an employee eagerly agreeing to a pay cut during depressed times.

  9. Todd Kleinhans says:

    Interesting story… about salary and me. Years ago, I was really underpaid based on market rates for what I was doing. During a performance review I had salary numbers showing current market rates, the projects I had succeeded on, the people I was supervising, etc. and I asked for a raise to match the market rate. It was a 40% increase. My boss busted out laughing and then quickly back-pedaled. I felt bad and I think he did too. The end result was that he went to the CIO and asked for more money and I got it! All I can say is that how do you know where you stand unless you are willing to research/talk about it? If not with your immediate peers, then look outside like you mentioned.

  10. Chris, good post a quite an interesting and frustrating situation. Personally I think businesses need to look at the whole HR department what value are they truly bringing? outsource the administrative functions and give hiring power / salary decisions to the managers. For this to work, you need to train the managers. I do think open salary levels with quantifiable performance and knowledge goals is a good start perhaps bonus pay could be variable within an range to reward meritorious employees for intangibles like being a good team mate and a good steward of business resources

    @sunil mean, median, and mode are all different ways of measuring “average”. It is a bit pedantic but certainly for some data sets median and mode are more valid ways of measuring an average.🙂

    • Chris Shaw says:

      Thanks for the read Big Jim….

      • Eric says:

        In addition to the HR departments like one you might see in Office Space, there are also truly outstanding HR professionals that understand how they can create net value for the company by creating a positive, rewarding environment for employees and creating policies that foster engagement.

  11. sqlmoto says:

    Interesting too that so many companies have a hard time giving raises for qualified internal candidates when losing them results in having to hire and spend 3 months (or more) bringing their replacement up to speed. Those are large costs associated with losing good employees, and too often managers don’t think about those in weighing the cost of a raise. I suppose most HR departments don’t get graded in employee retention?

    • 1LT INF, ret says:

      I’ve always found asking about the employee retention rate to fit in really well when you get to the point in the interview where they ask if you have any questions.

  12. […] higher salaries than what is set in some range by their HR group. That’s discussed a bit in this post from Chris Shaw that looks at hiring and […]

  13. rdw2 says:

    I have been in “Bob’s” position too many times. In most cases, I discovered that an opening for a new team member requiring the same (or sometimes _less_) experience had a minimum salary higher than my own. Also, in most cases, I was told that the company could not justify raising my salary to meet that of the new position.

    This is what I call a “Resume Generating Event”.

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