How to calculate a starting salary for your new hire?

You've identified a need for a new team member. This is an exciting prospect, bringing fresh skills and perspectives to your organisation. But before you can welcome them aboard, there's a crucial decision to make: what should their starting salary be?

According to a Morgan McKinley survey, involving over 3,400 professionals and 600+ employers, 59 per cent of employees are neutral or dissatisfied with their benefits package, highlighting the importance of compensation in attracting and retaining top talent.

For employers, determining the right starting salary can be a complex task. With numerous factors to consider, including market trends, individual qualifications, and organisational budget constraints, it's easy to see why salary decisions can be daunting. A misstep in this area can lead to employee dissatisfaction, increased turnover, and difficulty attracting new hires.

Gather Information and Assess the Candidate

Substantial data collection and research are crucial for any successful endeavour, and calculating a fair starting salary is no different. Before diving into specifics, take a step back to gather all the relevant information. This will ensure your salary offer is data-driven, aligned with your organisation's resources, and ultimately competitive within your industry.

Here are the key pieces of information you need to gather:

1. Hiring Budget
2. Employment Type
3. Experience & Education
4. In-demand skill sets
5. Industry Salary Benchmarks
6. Location
7. Supply & Demand

1. Hiring Budget

The first step in defining your new employee’s starting salary is to identify your overall recruitment budget. Knowing all the potential costs involved will help you better understand what salary you can offer.

Here are some of the questions you can ask your finance department that will help you define your budget:

• How many new hires does your company plan on recruiting this year?
• Will there be any seasonal hires?
• Will you have to pay for job postings?
• Are there any external recruitment costs?
• What are the internal recruitment costs? (Talent Acquisition salary, HR Manager salary, etc.)
• Will there be training and/or onboarding costs?
• Will there be interview expenses? (e.g. If the candidate is travelling a long distance)
• Will you have to pay for background checks?
• Will you have to produce branded content to advertise you are hiring? (Videos, flyers, banners, social media)

2. Employment Type

The next step in calculating your new hire’s salary is identifying their employment type. Should you use the budget to hire a permanent full-time employee, a contractor, or a freelancer?

Different employment types come with different compensation structures. Full-time employees typically receive a base salary and benefits package, while part-time and contract workers might receive an hourly wage or a flat project fee. Knowing the employment type upfront will help you determine the appropriate compensation model.

One of the key benefits of hiring contractors, for example, choosing to use Morgan McKinley’s contracting service, is that all costs are inclusive. This helps you manage your budget more effectively.

Another crucial benefit is that, due to the nature of the work, you will find it easier to find contractors than permanent employees. Again, this reduces your hiring costs (e.g. instead of paying for a job posting for 28 days, you might only have to pay for two days).

If you’ve identified that hiring a permanent employee is what your role requires, ensure you’ve included costs for “employee benefits” such as insurance, retirement savings plans, paid leave, etc.

3. Experience & Education

There is a direct correlation between a candidate’s experience and their expected compensation. The more experience and education you require for your role, the higher the salary will have to be.

Quantify the candidate's experience directly related to the role. Consider the number of years, the types of projects they've worked on, and their specific responsibilities. Regarding the educational background, assess the candidate's academic qualifications. Look for degrees or certifications that align with the job's requirements. The level of education and the institutions attended can also provide valuable insights into the candidate's knowledge and skills.

You can use our Salary Guide Calculator tool to understand exactly how much more you should be paying based on experience and skills by toggling between experience levels beneath the dial.

4. In-demand skill sets

Skills, particularly highly sought-after skills, play a crucial role when determining salary for new hires. While job titles can indicate skills and experience level, different companies may be using the same job titles to fill two very different positions. Keep up with the latest trends in your industry. Identify the skills currently in high demand and assess if the candidate possesses them.

Evaluate how closely the candidate's skills match the specific requirements of the role. This includes technical skills, soft skills, and any specialised knowledge essential for success. So, if you are looking for a person with a specific, hard-to-find skill set, the expected salary will be more towards the higher end of the scale.

5. Industry Salary Benchmarks

Now that you’ve identified two crucial factors when defining a new hire’s starting salary, you can use salary benchmarks to determine the average salaries for that role. Research average salaries for similar positions within your industry and geographic location. This will give you a realistic picture of what the market dictates for that specific skill and experience level.

However, be cautious when using readily available free data. Platforms like LinkedIn, Glassdoor, Salary.com, and PayScale surely offer a starting point but often lack the necessary granularity. Their data might not account for factors like industry specifics, location, or company size. This can lead to misleading information.

A more reliable source of salary data comes through professional associations. Organisations often offer salary surveys or data sets specifically for their members, sometimes at a discounted rate or even free. This data is usually more accurate and relevant because it focuses on a specific industry and may even account for company size within that industry. This targeted approach provides an almost accurate picture of what truly competitive compensation looks like for your specific hiring needs.

An easy way to do this is using our Salary Guide Calculator tool. The tool will show you up-to-date salaries once you’ve filled in the fields (job title, location, industry, etc.). This is also a great way to understand how much your competitors pay.

6. Location

Location is another factor that can impact someone’s salary. This is because the location also takes ‘cost of living’ into account, which is why you will find that salaries in metropolitan areas are often higher than they are in more rural locations.

According to the International Labour Organization’s paper, rural workers are paid, on average, 24 per cent less than their urban counterparts on an hourly basis, and only half of this gap can be explained by rural-urban discrepancies in education, job experience and occupational category.

7. Supply & Demand

If you are hiring in a niche area, where demand outweighs supply, you should expect to pay a higher salary to attract the right people.

This is where outsourcing your hiring to a recruitment agency that specialises in your area of expertise can in fact save you time and costs. The benefit of using a recruitment agency in this case is that specialist recruiters can tap into their existing talent pool much faster and find specialist professionals who are often not actively applying for jobs.

The amount of hours consumed and money spent when sourcing talent, writing job descriptions, writing job ads, interviewing people, shortlisting candidates etc. is often underestimated. At this stage you can write a list of what the costs are for trying to fill the position using your existing staff (salaries of internal recruiters, job ad writing, interviewing candidates) or whether it is better value to use a recruitment agency.

Define Your Pay Philosophy

Your pay philosophy is the guiding principle that informs your compensation decisions. It should align with your organisation's goals, values, and culture. Whether you pay above, at, or below the market rate depends on several factors, such as your company strategy, financial situation and talent needs.

A well-defined pay philosophy helps guide consistent salary decisions and supports your overall talent management strategy. For instance, a company aiming to attract top-tier talent in a competitive market may choose to pay above the market rate to position itself as an employer of choice.

Establish a Pay Structure

A pay structure is a framework that organises your jobs into different levels or groups and assigns a salary range to each. This structure helps maintain internal consistency and ensures external competitiveness.

To create a pay structure, consider these steps:

1. Group jobs: Categorise jobs based on factors like skills and responsibilities.
2. Set salary ranges: Assign minimum and maximum salaries for each group.
3. Define progression: Outline how employees can move up within the structure.

You might create a pay structure with three levels: Entry-Level, Mid-Level, and Senior-Level. Entry-level jobs would have lower salary ranges, while Senior-Level jobs would have higher ranges. You could use job evaluation to determine the relative worth of each job and then use market pricing to set specific salary ranges.

Source: HR Wise

Determine salary ranges using methods like job evaluation or market pricing. A sturdy pay structure supports organisational goals and maintains internal equity.

Consider the entire compensation package.

Last but not least, perks and benefits should also be considered when determining a new hire’s salary. Depending on the industry and the talent, having perks and benefits such as allowing people to work from home, offering professional development opportunities or additional leave can help you attract the right talent.

Salary isn't the only factor attracting top talent. A 2023 Gallup poll found that younger workers prioritise learning and career advancement opportunities over salary alone.

Competitive benefits packages can be a major draw. Consider offering:

• Health Insurance (Medical, Dental, Vision)
• Paid Time Off (PTO)
• Performance Bonuses
• Paid Sick Days
• Retirement Savings Plans (401(k), Pensions)
• Flexible Work Options

Assess salary relationships within your organisation, ensuring fairness and equity.

When determining a new hire's starting salary, it's essential to consider how it will impact existing employees in similar roles. This ensures internal equity and prevents dissatisfaction within your organisation.

Here are some questions to consider:

• How does the proposed salary compare to the pay of existing employees with similar responsibilities?
• Are current salaries within your organisation aligned with employee skill levels and experience?

Helping you hire the best people, at the right cost

While a few steps are involved in identifying your new hire’s salary, following the above steps during your recruitment process, and using our interactive Salary Guide Calculator, will help you find the right salary to pay your new employee.

However, if you have any questions about finding your next hire or need help identifying the right salary, feel free to contact us.