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August 16, 2022
7 min
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Maybe this scenario sounds familiar: After months of searching, you've finally found your dream candidate, and are ready to extend an offer. After putting together your best possible compensation package, you're disappointed to find that they turn you down — and now it's back to square one.
So, where did things go wrong? There are many possible answers, but an important place to look starts with base and variable pay.
Base pay is one of the most important metrics that a candidate will use to determine whether or not they want to work with a new company. 59% of candidates say that base salary is a leading factor in their job search — but it's also only one piece of a quality total rewards package.
In this article, we'll explore how to determine both competitive and equitable pay, to help you close and retain the best talent out there.
Put simply, base pay is the salary employees earn before taxes. Determining the right base pay for any given candidate is complex, and best achieved with a pulse on current industry trends.
In order to know how much you should pay your new hires, it’s important to access data to find out how much other companies are paying which you are competing with for talent. The factors included in competitive benchmarking include:
Company size - Larger and more established companies usually offer greater benefits and base pay, while scrappier startups may have less cash flow, but make up for it with generous equity packages. Look at similar sized companies to understand their range of base pay for similar roles you offer.
Industry - Compensation may greatly fluctuate depending on how lucrative an industry is. For example, product managers working in tech versus product managers working in the nonprofit sector will have a different set of salary expectations. Healthcare, engineering, IT, finance, energy, and legal are the highest paying industries in the United States — due to a hybrid of specialized skill sets and potential for company profits.
Location - Location plays a complex factor in deciding how to compensate an employee. Many employers approach location-based compensation on:
A growing chorus of voices in the remote-first space advocate for pay based on skill and contribution rather than location. The reasoning for this is simple: The value of the employee's labor should reflect their contribution to the company, not where they're located.
Just as one example, many employees would find it unreasonable to take a pay cut for moving to a different region, when their material contribution to the company hasn't changed.
Skill-based compensation also encourages freedom of movement for employees who do not want to — or cannot — be committed to their original location and need more choice around their lifestyle. Companies that embrace this philosophy are employers of choice for remote workers.
Many employers have a compensation philosophy — a statement that documents their approach to employee compensation. This is usually based on the company mission and values, and helps guide whether the employer will lead or match the market. Your compensation philosophy can also impact how you use leveling.
A level refers to the level of seniority that someone is at in their career. How companies determine leveling is individual to each company. Your company can calculate its own levels by factoring in considerations like:
Leveling is a straightforward way to delineate payment between employees within similar job roles, but with different levels of experience and expertise. It also outlines a clear path for growth and promotion within the company. For example, a product manager with three years of experience will be at a different level of compensation than a product manager with 10 years of experience.
After you’ve looked into leveling, create bands that span job families, levels, and locations. Bands represent the minimum or maximum base salary an employee will receive.
For example, a company may have five different levels within a job family, from junior to senior level staff. Within each of those levels, there’s a band of minimum and maximum compensation.
Here’s an example of what that might look like:
Establishing pay bands has several positive effects: it brings transparency to compensation practices, standardizes pay in a way that encourages equity across factors like gender and race, and also establishes a pathway for employee growth. It’s also law in 14 states (and growing) to share a role’s salary range at the job posting level.
Let’s say you’ve established your pay bands ahead of time. When it’s time to make an offer to a candidate, you’ll just need to level that employee. Based on the location or job family that they fall within, you’ll have the salary range to stay within.
Base pay isn’t the only way for employees to get straight cash — bonuses and pay incentives are also a persuasive way to sweeten the pot. Depending on the compensation structure of the team, departments like sales may more frequently use variable pay to motivate employee performance.
Some of the most common monetary incentives include:
Signing bonus
According to data compiled from the thousands of offer letters sent through Agora in 2022, employers often offer sign-on bonuses at an average of about 9% of the employee's salary. The average bonus size was $14,000.
Sign-on bonuses are usually given upon joining a company, but some employers put restrictions on them. For example, the employee will have to give back their sign-on bonus if they don't stay on board for at least six months.
Spot bonus
A spot bonus is a spur-of-the-moment gift to an employee who has done exceptionally well or positively impacted the company. This may be given as a public recognition award or as a retention tool. A typical amount can range from $50 to $1,000 or more.
Referral bonus
Many companies offer bonuses for referring new employees to the company. Some of these referral bonuses also come with contingencies. For example, not paying out unless the referral employee stays with the company for at least six months. Drafted calculated that the most effective referral bonus that strikes a balance between results and spend efficiency is between $3,000-$5,000.
Holiday and annual bonus
Typical holiday bonuses can range anywhere from $100-$5,000 or more, but they don't just have to be money — a bonus could be extra paid days off or company holidays, for example.
Commission
Employees who work in sales often have a compensation plan that allows them to make commission when they hit certain goals. An on-target earnings (OTE) model displays the expected total pay, so long as a salesperson hits their targets.
Here are some motivating ways you can approach commission:
Pay mix - Select a ratio of base salary to commission. For example, this could be 60/40 (60% base pay, 40% commission pay). The ratio largely depends on factors like the complexity of the product and sales cycle, and motivation and experience level of the employee.
Accelerators over 100% attainment - If your employee surpasses the commission ratio of their OTE, consider adding a multiplier. This incentivizes employees to crush their goals and get the multiplier. For example, let's say Andy works on 40% commission pay and his sales quota to hit OTE is $4,000. This month, he hit $7,000. Your company offers an 8% rate multiplier for anything over the employee's commission pay ratio. That means Andy will make $240 [($7000-$4000)*.08] in addition to his base pay and $7,000 in sales.
Uncapped commission - Uncapped commission is a huge motivator for any salesperson. Not only does it encourage more sales, it can also cultivate an employee who is more loyal to the company and invested in its success.
Creating a leveling philosophy along with bands backed by research means your offer won't be a shoot in the dark. Instead, you can easily anchor base pay around bands every time you send a candidate an offer.
Not only does this increase the likelihood of an accepted offer, it also prevents unintentional pay discrimination and promotes equitable pay practices throughout your company.
…
Once you’ve determined what will make for competitive base and variable pay, you have the foundation for a quality total rewards package. But figuring out equity offerings, perks, and benefits are crucial next steps. Figuring out how to display that total value to both candidates and employees is what may help set you apart.
Keep compensation information secure
Once you’ve come up with information like levels and bands for base pay, upgrade from basic spreadsheets. Agora offers secure sharing and collaboration for all your compensation decisions.
Display total rewards
Most candidates and employees never get to see — much less understand — the full value of their total rewards packages. Many companies are now turning to compensation software tools like Agora to communicate total rewards and boost employee hiring and retention.
From unforgettable offer letters to demystifying compensation, we’ve got you covered. Want to see how it works? Schedule a demo with our team.
Simplify your compensation practices and effectively communicate total rewards to your people.
