I worked with a startup client in recent months who was in search of a senior level Java developer. Early on, they set their expectations for what competitive compensation looked like, determining that the market should be yielding $110K – $115K for high level candidates. In reality, the going rate for senior level Java developers in their region started at $130K, with some markets yielding as high as $200K for the right talent. Despite this information, the company was insistent that the offering would attract what they needed.
For startups, this is a common mental pitfall, and can be a difficult one to escape. Companies will take one data point from an existing candidate or employee, and latch on to that number as the basis for their offering. Although this may reflect an accurate offering, there are many instances where this data point is based on an underpaid employee or a less experienced candidate. For cash-strapped emerging companies, it can be difficult to stray away from a low number once the expectations are set. Founders can easily get anchored to an attractive number that is unreasonable in reality. Yet for today’s startup, trying to attract needed top talent while competing with a below market rate can ultimately lead to failure.
Sometimes, companies get tunnel vision because of an unreasonable data point. Yet many founders simply have difficulty determining the market rate for the talent that they need. After all, too low of an offering simply won’t attract what you need, but too high an offering can be a waste of resources, and in itself can also cause some candidates to opt out.
Thus, the real question: How do you set your salary offering to get the talent you need?
1. Research setting salaries for comparable positions: This makes sense as a starting point, since this almost literally defines the ‘market rate.’ Be sure to look into positions requiring the skill sets, technology exposure, and experience level that your company requires.
2. Research the going rate in the job’s locations: The salary for a senior level Java developer in Kansas City will be dramatically lower than one in Palo Alto. Even within the internal geography of the Bay Area, there will be salary differences based on location.
3. Ask your candidates: The talent that you already interact with can be a great source of data. Gather information about what they make with their current work and what they are seeking at their next venture. If you can get a straight answer, you can also inquire about other positions that they are researching and/or applying to, and put research around the compensation for those positions.
4. Consider what it will take to lure top talent away from their current position: The fact is that top talent is rarely out of work. Thus, your market for top performing employees is mostly passive, and has the option to simply stay where they are. Although salary is only a small factor in choosing work among top talent in most cases, especially for those looking to work at startups, it remains a component that affects every candidate’s decisions nonetheless.
5. Compare what you can afford to the importance and long term impact of the position: As mentioned, emerging companies are inherently strapped for cash. Yet early on, any new hire will have a significant impact on the bottom line and on both the short and long term growth of the organization. This should not be a strong factor in setting salaries, but may help you determine whether you are hiring for the right position at a given time.
You may be cringing at the market rate that you just recalculated. But consider this: If you don’t get top performing talent with the right skills and experience for your needs, what kind of damage will that do to your startup’s progress in the long term? If your compensation doesn’t compete in the talent marketplace, you will have difficulty getting what you need, and hinder your company’s growth. So don’t anchor yourself to a number, and stay open minded. Get multiple data points from a variety of sources, and figure out where you fit within that mix. And if you still have trouble justifying the cost for the benefits of the position, then you might want to reconsider the hire altogether. After all, your company’s talent will be its most valuable resource and its highest yielding investment.