How Much Should You Pay an Employee

This is a question we hear regularly as no one wants to be overpaying (unless you’re Google and Facebook,) and underpaying means you’re at risk of staff being poached.

Historically, companies have looked at previous salaries and the competition to establish the price of a role. This simplistic model results in a lot of standardisation around how people are paid, particularly in established sectors such as Management Consultancy and Financial Services.

In an effort to correct the gender pay gap and stop perpetuating the status quo, new legislation has come into effect in the states of California and New York preventing companies from asking prospective employees about their past salaries. This simple change means the historical model of pricing is redundant in these states and frankly, for any company taking the gender pay gap seriously.

Pricing on competition alone is inadvisable because:

And really, who wants to be reliant on others for their own business choices anyway?

Enter the:

Let’s break this down:

Competition

A simple search using the basic parameters on the major job boards (and Google) will help you establish your baseline. For example:

[Job Title] + [Location] + [company size]

Example: [Finance Director] + [Central London] + [50 people] = £70–130K

Impact

This is a somewhat lengthy but useful five-step exercise. It helps you define the brief and understand the impact this person will have on your business.

1. Write your wish list

Example: We are looking for a Finance Director who has helped build a SaaS company and has fundraising experience (£5–20m) and can navigate regulation in the UK and US.

2. Extract the basic wants from this wish list:

3. Extract why these wants have made the list:

4. Where is the existing team already strong?

This is a good starting point to help you define your brief. For the purpose of this piece, we’ll move straight onto the impact this person will have.

5. Based on this exercise, assess which best applies:

The example role we’ve used would be marked as a three: HIGH IMPACT. How does this affect the price? Based on a pure mathematical formula using the established baseline of £70–130K and impact of three, the price would now be £125K.

How did we get there? If you quarter the price range (£70–130K), and the role is third quartile for high impact you’d end up at £110. The existing team only covers one key skill/piece of knowledge (Regulation,) meaning this person has to bring everything else to the table — i.e., they’re at the third quartile in that calculation too.

Now, check the price and get some social validation:

Company

Understanding your worth to a prospective employee will help determine whether the price is negotiable. The following are useful questions to ask:

These must be answered as honestly and objectively as possibly. Using the example before:

You can lower the price slightly because you’re offering value in a different form. For simplicity we’ll put this at ~£100K and market a small range with this as the mid-point — £90–110K. *Note that it isn’t advisable to do a pure mathematical subtraction based on the equity/shares on offer.

Individual

Now it is up to the individual to decide what they would like to be paid. A higher salary will mean more equity in this case and vice versa. Allowing an individual to decide what works for them based on their personal circumstances makes the whole process much more collaborative and starts things off on a positive foot.

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