When companies post jobs, it may seem pretty random why they offer the pay rate they do. Sometimes, the rate they offer is random. Normally though, there is a method to the company's madness on how they determine the pay rate. When a company needs to get work done, they can either distribute the work amongst current employees or hire someone from the outside to perform the work. If the company decides to bring on an employee, they will have to come up with a dollar value that will attract someone competent to do the work, without overpaying. Before we go behind the scenes to gain incite into a company's actions, let's undergo an exercise that utilizes similar principles while probably hitting closer to home.
Hiring a Yard Worker
Suppose you have a house with a yard. You spend your Saturday's working in the yard. One day, you make the decision that you need to hire someone to take over the yard work for you.
First, you have to determine exactly what your needs are. For this example, we want to hire someone to do our yard work for a good price. Now we have to come up with how much to pay someone to take on the job. We can do one of several different things:
1) Throw a number out and see if our candidate takes it (random approach)
2) Ask neighbors what they pay others to care for their yards (survey approach)
3) Ask a bunch of people what they would charge to do the work (economics approach)If we look at each of these methods, we can get the pros and cons of each method.
1) Random Approach
This is where you toss out a number to someone to do a job without justifying the amount offered. The pros of this method are that the time spent coming up with the offer is minimal. The cons are that you don't really know if you are overpaying or underpaying for the job. While the disadvantage of overpaying for someone to do the job is obvious, there is also a downside to underpaying. If you decide to underpay, a quality yard person may be swiped away by a neighbor that's willing to pay a little more. Over time, the only person you would be able to keep is someone that does not do a great job, or they are not doing the job solely for the money.
2) Survey Approach
When you ask around the neighborhood and get feedback from others that hire yard service, you are taking more of a survey approach. The pros are that you will have a very strong idea of what other people offer people to take care of their yard, you may see what services are covered for different prices. You can then make smart decisions about how you want involve the yard worker into your tasks. You will also know what you should plan to pay before sitting down at the table with your potential provider. The con is doing this research can take a lot of time.
3) Economics Approach
Another approach that is similar to the survey approach, but takes a different path is the economics approach. To do this, you talk to several people that offer yard care services and ask what they charge. Once you talk to enough people, you can make an informed decision based on your opinions and the feedback from each person. The pros to this method are that there is minimal cost to do this and you can get a decent representation of what it will cost you to care for your lawn. The cons of this method is that it is very time-intensive to meet with several potential yard care providers, you do not have a full appreciation for what yard maintenance will cost until the tail end of the process and the pricing you hear may actually be each providers' desired high price (if they do not know you are interviewing several other providers).
Relating to the Corporate World
The very same principles that you would incorporate for hiring a yard worker also apply to a company looking to hire an employee, only the company will need to do this over-and-over for every position they hire.
Very informal companies, like start-ups, may go with the random approach. People may be hired reactively to keep up with rapid growth and business demands. These companies might be more inclined to have an immediate need to get work done, so there may be more of a "shoot from the hip" philosophy in paying whatever it takes to get the right pieces in place.
More structured companies may go with the survey approach. When you have hundreds or even thousands of employees, pay mistakes can quickly impact the bottom line. These companies would likely participate in third party salary surveys to identify competitive pay rates. Once competitive pay rates are determined, salary decisions can be made based on the company's pay philosophy.
Other companies may not necessarily purchase salary surveys, but rather let the market more directly dictate the pay rate. For example, a company thinks it needs to pay $10.00 per hour to hire an assembler. After interviewing 10 candidates, it finds that most competitors are paying $11 per hour. The hiring team must then go back and make a decision on a) hiring a lesser qualified worker, b) doing without the position, or c) accommodating the new market information and adjusting to the $11 per hour rate.
Whatever approach a company takes, it is always good to have a sense for it. This will help you in how you approach pay discussions, both in the interview process and down the road when you want to approach your boss for a raise.