If you own a startup or small business and aspire to go public or get acquired, there are still benefits to offering equity now. Here are key considerations and the exact steps to take if you decide to make equity part of your compensation package.

What is Equity Compensation?

While there are a variety of ways to offer stock to your employees, the two most common methods are:

• Stock Options: You give employees the opportunity to buy or sell a specific number or percentage of shares at an agreed-upon strike price if the company goes public, is acquired, or they leave the company and want to sell their stock back.
• Stock Grants: Stock grants are like stock options except you’re giving the employees the stock. They do not need to buy it from the company. The value of the stock is whatever the market value is at the time the company goes public or is acquired.

The Benefits of Offering Equity

When public companies give stock options and grants there’s already a monetary value. Because your company is private, the stock options and grants don’t have a monetary value yet, but they could be lucrative in the future. Here are the main reasons you may want to offer equity at this stage:

1. Pay Lower Salaries

You may want to spend most of your capital on expanding your products and services and growing your team. When you offer equity compensation, candidates may be willing to work for a lower salary now if they think they will ultimately have a windfall if the company is successful. Instead of paying large salaries, you can hire more employees.

2. Recruit Top Talent

It’s difficult to attract top talent if you’re offering a salary that’s lower than the market rate. Offering equity can incentivize talent to join at a lower salary.

In some instances, people may be willing to “work for equity.” This means they will earn a stake in the company instead of a salary. However, the equity doesn’t have any value yet and many people can’t afford to take that option.

3. Increase Retention

Business owners often use equity compensation to increase retention by requiring employees to be at the company when their stock vests. The vesting date is when employees officially own the stock. Some companies set a vesting schedule, so employees get a certain percentage each year.

Many companies have a four-year vesting schedule with a one-year cliff. This means new employees don’t receive any equity until they hit a year and then get a certain percentage every subsequent year. For example, they might get 25 percent each year. If an employee leaves before it all vests, they would still own the amount that already vested.

4. Boost Employee Engagement

When your employees have ownership in the company, your team is bound to have higher levels of employee engagement and morale. People are likely to work harder and be more collaborative and committed. Companies with high levels of employee engagement and morale are often more successful.

The Potential Cons of Providing Equity

While there are clear benefits to offering equity compensation, there are possible downsides that you can try to mitigate.

1. It can be Complicated

When you’re in the early stages, it can be hard to predict the long-term valuation to set the strike price. To incentivize employees to stay at the company, the strike price should be lower than what the market value will be so people have a “discount.” If it’s higher than the market rate, it’s meaningless because people can buy shares at the lower price.

It can be easier to give a stock grant, otherwise known as a restricted stock unit (RSU), because you don’t need to anticipate the market rate. The stock will be worth whatever it is worth when you go public or sell your company.

Talk to an accountant and lawyer to make sure you follow all the necessary tax and reporting requirements. Stock options and stock grants are taxed differently, so consider having them talk to your team.

2. You Have Less Ownership in Your Company

You’re giving away some of your ownership and, depending on your terms, only get it back if the person leaves the company before it vests.

You stand to make less money from an acquisition or going public because you hold fewer shares. However, if you can’t pay high enough salaries to get the talent you need, you may not be able to get to that stage.

3. You Could Have a Harder Time Attracting Investors and Buyers

If you give away a large proportion of your shares, investors and buyers may want the opportunity to buy more shares than you can provide. You can create an employee option pool to set aside a set percentage for employees, such as 10 percent cumulatively. You’d pull from that amount to give equity to new hires.

How to Offer Equity

Here are the steps to take if you decide to provide equity compensation.

1. Create an Employee Option Pool

Your first step is to determine how much equity you want to reserve for your employees. As you hire new employees, you can see how many shares you have left and whether you will need to dilute some of your shares to add more to the employee option pool.

It’s helpful to create a capitalization table that shows everyone who owns shares in the company, including investors, and how much ownership they have. If people leave the company before their stock vests, you can decide how to redistribute it.

2. Decide the Type of Stock and Amount

Your next step is to decide if you want to offer stock options or stock grants and preferred or common stock. To determine how much equity compensation to give each employee, business owners often consider whether it’s an early employee, their seniority level, and how critical the role is to the company’s success.

Some business owners also let employees choose if they want to have more equity but a lower salary, or vice versa. You can also incentivize employees by giving them a larger stake as they get promoted. Some business owners have performance-based vesting schedules for executives, meaning their stock only vests if the company hits pre-determined key performance indicators (KPIs).

3. Create Contractual Agreements

Work with a lawyer to create contracts with each employee. If it’s relevant, you may want to include the number or percentage of shares, the strike price, the vesting schedule, a buy-sell agreement, and the expiration date.

Keep Optimizing Your HR Policies

Now you know how offering equity compensation can help you hire a larger team, attract and retain talent, and boost employee engagement and morale. Continue to strengthen your company culture and performance by receiving expert HR and management advice from Monster.

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Today, for reasons like pay equity between front-of-the-house and back-of-the-house workers, as well as wage reliability, many business owners are unsure of the best way to navigate the practice. Even more controversial is the practice known as a “tip out,” where employees who interact directly with customers and receive tips share the money with other staff.

While diners and hospitality staff alike have expressed frustration regarding the tipping debate, there’s been no significant legislative agenda to resolve an issue that impacts the livelihoods of millions of workers nationwide. This leaves business owners with little guidance for how to address it. So how should you handle tipping out at your establishment?

Why A Tip Out Structure Is Important

The short answer: clarity. Front-of-the-house employees like waiters and waitresses, bartenders, bussers, and counter personnel who serve customers, depend on tips for a substantial portion of their income. In addition, the Fair Labor Standards Act (FLSA) clearly spells out what business owners are allowed to mandate regarding tips paid to an individual employee.

Regardless of the method you use, minimum wage requirements need to be met for all employees. Some states have additional laws that grant more discretion to the actual employee who receives the tips.

With that in mind, documenting a clear tipping structure for your employees can help ensure that you comply with federal, state, and local laws. Also, employees won’t have to make a judgement call each night, or fear unfair treatment or retaliation based on a co-worker’s decision. Create a solid structure and get more buy-in by engaging employees and considering their feedback when you decide on a structure that will work best.

What Are the Most Common Tip Sharing Structures?

There aren’t many hard and fast rules regarding tip sharing, but you don’t need to recreate the wheel. Here are three common systems for dividing tips at your business.

1. Tip Out Using Set Percentages

This is a concept whereby servers retain a certain percentage of the tips they earn and share a set percentage of the total tips with other front-of-the-house staff during a shift. One of the more commonly used systems to apply is for the waiter to keep 70 percent, share 15 percent with the bussers, 10 percent with the runners, and 5 percent with the bar.

Remember that this is only a general guideline—flexibility and transparency are key. The agreed-upon percentages should reflect your business’s unique needs and adjusted according to the usual distribution of the workload.

Workloads may even change from day to day, depending on which part of the front-of-house staff picks up the heaviest parts. For instance, the bar may be especially busy on a day where you offer drink specials, so they may get an increased percentage of the tips during that shift. Or, bussers may see an uptick in work when there’s a high turn rate for tables. In that scenario, they may receive a greater share of the tips than usual.

2. Tip Pooling

This is a practice covered under federal law. FLSA mandates that an employee must retain all tips, but “…does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips.” As such, tip pooling is one of the more straight-forward and expressly legal tip out structures.

Tip pooling is just as it sounds: all tips during a shift are gathered into one “pot.” From there, the tips can be divided based on a variety of factors: agreed-upon percentages, number of hours worked, or the amount of time each employee spends directly interacting with customers.

For example, you and the front-of-house staff may assign a certain number of points (or a percentage) to each group of employees. It could be a 10-point system, whereby servers get 6 points, bartenders get 3 points, and bussers get 1 point. From there, you would divide the pooled tips based on those ratios or percentages. Out of $100 in pooled tips for a given shift, for example, the servers would evenly share 60 percent, the bartenders 30 percent, and the bussers 10 percent.

3. Service Fees and Surcharges

This system isn’t part of traditional tipping practices but has seen growing popularity with business owners attempting to provide equity between compensation for front-of-house and back-of-house employees. In this hybrid model, the restaurant automatically adds 15 to 20 percent of the total to the bill, listing it as a service fee or “hospitality included.”

From there, the owner can determine how to split the “tips” (or the set hospitality fee) between employees. Since this isn’t money directly paid to the server, owners have discretion to “tip out” kitchen staff with a portion of those fees.

However, hospitality-included policies continue to receive mixed reviews from patrons as well as front-of-house staff.

While some business owners have seen wait staff quit because they don’t make as money as they’re used to, others find it a relief. Servers don’t have to “turn and burn” to increase their earning potential. Instead, they get to spend time attending to customers and ensuring a top-notch experience. Some owners have also found that automatic service charges significantly decreased the level of animosity among staff, making for a more harmonious workplace.

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The internet has made salary information easier to obtain, leading top performers to demand more information about their current compensation and how they can augment it. At the same time, employers are working to close pay gaps due to race and gender, and to provide employees and applicants with more transparent salary ranges.

About three-quarters of employers responding to a survey said they have a pay strategy or are currently reviewing theirs, with most focusing on retaining top performers.

If you’ve been asked to revise your company’s pay scale and you’re not a compensation specialist, don’t panic. Embrace this opportunity to create a more equitable, competitive, and productive workplace.

The Benefits of Revising Your Pay Structure

Revamping your salary structure will require you to answer basic questions about your business and its mission and goals. If you are an innovative company looking to become a market leader, you may choose to develop a highly competitive salary scale designed to attract top talent from throughout the country or even beyond. If you’re a regionally focused business, you may choose to align salaries to rates of compensation and the cost of living in your community.

And that’s just a preliminary step. It’s a big task, but the benefits are many. Analyzing and revamping your pay structure:

• Creates a pay scale that is competitive enough to attract highly qualified applicants.
• Places you in a more powerful position during salary negotiations.
• Makes salary negotiations easier, more straightforward, and less time-consuming.
• Establishes an equitable approach to salaries, assuring employees that they are being compensated more fairly.
• Increases employee retention.
• Incentivizes high levels of employee performance and engagement.
• Helps employees feel as if the success of your company and its mission is in their best interest.

Popular Types of Pay Structures

During the preliminary phase of your salary restructuring endeavor, you’ll want to familiarize yourself with the most prevalent structures and determine which is most appropriate for your business.

• Traditional: Employers create a unique salary for each position, typically by level of authority. This is probably only appropriate and workable in a very small workplace with few employees.
• Broadband: Pay ranges are pegged to the type of work performed. For example, there might be one set of pay ranges for administrative support, another for technical support, another for sales and executive positions, etc.
• Step-based: Pay scale is determined by tenure in the role or years at the company. Many schools or unionized workplaces have this type of pay scale. Those who work in skilled crafts also often command progressively higher levels of compensation to align with levels of mastery—apprentice, journeyman, master—for example, mechanics, masons, or electricians.
• Market-based: In this structure, some roles have a higher or lower compensation scale based on market demand for that role’s skill set and what candidates in that role can command on the job market.

Depending on your business, you may need to use more than one of these scales; for example, a step-based scale for employees in the skilled crafts and a market-based structure for your sales and support staff. The four steps below will help you determine which structure or combination of structures will work best for you.

Step 1. Analyze Your Current Pay Structure

Now that you’re familiar with the most prevalent approaches to compensation , it’s time to analyze your current salary structure. Start by collecting job descriptions and comparing the contributions of each role to its current level of compensation.

As you complete this task, ask questions about each role:

• How crucial is each job to the success of your organization?
• What is each position worth?
• Are you offering equal pay for equal work across categories of gender, race, and other legally protected categories?

Slight differences within the same department and at the same level of responsibility are to be expected, as long as they can be attributed to differences in education and prior experience. However, wide and persistent differences in compensation between employees of different gender and ethnicity identities are a red flag, especially if they exist in similar roles. As a growing number of states enact pay equity laws, such discrepancies can leave you vulnerable to lawsuits.

Step 2. Determine How Your Salaries Compare to the Competition

Now that you’ve evaluated your own salary levels, it’s time to see if you are in line with other employers in your sector. Are you underpaying or overpaying for talent? This activity is called salary benchmarking.

Large employers often hire a consulting firm to collect highly targeted competitor salary information, but the price tag can be prohibitive for smaller employers. You can gain reliable salary information for the price of a professional association membership or subscriptions to online trade journals that often publish year-end salary surveys.

If you combine this low-cost data with no-cost salary statistics from sources, such as the Bureau of Labor Statistics or its affiliated site, O*Net. You can also use a salary tool that provides median pay rates by profession and geographical location.

You also need to consider other forms of direct compensation. Are your competitors rewarding their employees with bonuses or commissions? If so, you need to factor these additional opportunities for compensation into your pay scale if you want to remain competitive.

Step 3. Establish or Adjust Salary Ranges

Now it’s time to put some your research into action by establishing clear salary ranges and to adjust current employee compensation to reflect each role’s value and to avoid the appearance of bias.

Make sure that proposed salary ranges won’t negatively impact revenue, as each position’s total compensation should pay for itself and then some. Remember that sometimes generous benefits—low or no-deductible health insurance, for example—can outweigh a slightly higher salary range.

Step 4. Consider Building in Pay Progression

“Pay progression” refers to a pay structure based on achievement-based incentives. Adding pay progression into each salary range will add another step to an already labor-intensive endeavor, but it will offer the following benefits by:

• Incentivizing employees to attain new skills, certifications, and competencies.
• Encouraging your most ambitious employees to remain in your organization as they gain marketable skills.
• Aiding in recruitment, since only about one-third of companies provide clear information on advancement to their employees.

Clearly outlining ways for employees to earn performance-based pay increases is an effective way to reward high achievers and lure top performers away from your competitors.

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You’ve taken a huge step toward attracting the best job applicants in the field by re-aligning your compensation structure. Now put that competitive salary range to use with a free job listing from Monster, and gain access to better candidates faster.

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Now as remote work is becoming more common, many business owners are debating whether they should make these cost-of-living adjustments (COLA) based on how expensive it is to live where the remote worker chooses to reside. It’s a difficult decision, so we’ve rounded up the most common options for setting salaries, how they could impact your remote workers, and how to start the process.

The Most Common Strategies for Setting Salaries

There are two main options for setting salaries. You could set a global salary or make local salary adjustments. If you choose a global salary, you’d pay employees in the same role and seniority level the same salary no matter where they live. Alternatively, if you make local adjustments, you’d pay employees different amounts based on where they work, based on a COLA.

Here are the three main strategies for setting salaries:

1. National Median

If you use this strategy, you’d base the salary on the national average salary for a specific role. In the United States, the Bureau of Labor Statistics (BLS) collects salary data from employers in every state, including metropolitan and nonmetropolitan areas, and publishes the median salary. Their data also includes the average hourly rate and a range from the tenth to the ninetieth percentile.

2. Employer Location

With this strategy, you’d set the salary based on the median rate for the position and the city where your office is located. There are a lot of helpful salary tools that you can use to find the median salary for the city. Some include the low and high end of the range so you can adjust based on the person’s skills, experience, and other performance-based factors.

3. Employee Location

If you choose to make salary adjustments for remote workers who live in a different city, you’d use this strategy. Like with the other methods, you’d use a salary tool to find the median salary for the role and the city where the person lives.

The Possible Impacts of Making Salary Adjustments

If you choose to adjust salaries for remote workers, it could have an impact on retention and recruitment. Here are some of the main considerations:

Company Culture

If you make adjustments for current employees because they choose to work remotely from another city, they might be resentful about taking a pay cut when you’d previously budgeted for their higher salary. If employees in the same role and seniority level find out that they are making substantially less for the same work, they could become less motivated, productive, and committed.

Before deciding to decrease salaries for remote workers, consider the money you may be saving by having all or some of your employees be remote. For example, you’re likely saving money on rent and utilities, office supplies, and commuter benefits. Some employees are more productive and perform better when they work from home, so you might be getting better output.

Company Performance

Salary adjustments for remote workers could lead to decreased employee morale and engagement which could be detrimental for company performance because of a number of factors, including lower-quality work, decreased productivity, and higher turnover.

The increased turnover can be a major expense because, in addition to losing top performers, it is expensive and time-consuming to hire and train new employees. Although it might seem like you would cut costs by making salary cuts, you could end up losing money.

Discrimination

The U.S. Equal Employment Opportunity Commission (EEOC) enforces federal anti-discrimination laws that prohibit discriminating against candidates and employees based on their: race, color, religion, sex (including gender identity, sexual orientation, and pregnancy), nationality, age (over 40), disability, or genetic information.

Even if it’s unintentional, if your policies disproportionately impact a protected group, you could be liable for discrimination under what’s called “disparate impact.” If mostly women or older employees, for example, decide to work from home and are paid less, they can file a claim with the appropriate federal or state agency and in some cases file a lawsuit.

Recruitment

There will be increasing competition as more companies, including large corporations that can pay high salaries, hire remote workers. One of the main benefits of hiring remote workers is that you have access to a larger pool of qualified candidates.

However, to attract top talent, you may need to pay more. This is especially true if your headquarters is in a less expensive city, and you want to recruit remote workers who live in more expensive locations.

How to Start the Process

Here are some steps you can take as you consider whether you should make salary adjustments for your remote workers.

1. Communicate With Your Employees

Use an employee survey to find out your team members’ preference for remote work. Ask if they’d prefer a totally remote, in-person, or hybrid model. Additionally, find out if they would prefer to work remotely at a lower salary depending on where they live. This will help you make a decision a majority of your employees support and make your employees feel included in the decision-making process.

2. Give Employees the Option

If you choose to make adjustments for remote workers and retain your office or a co-working space, give them the choice of keeping the higher salary by working in the office. Let them know the salary adjustment for their location to help them make a decision that works for themselves and their families.

3. Consider Alternatives

Instead of making salary cuts, you may want to implement a salary freeze. If you need to decrease salaries, consider perks you can offer like home office equipment and internet and phone bill stipends.

4. Seek Out Advice From HR and Legal

It’s possible that changes to your compensation strategy could violate contractual or employment obligations. Before making any decisions, reach out to lawyers and HR experts for advice.

Considering Changes for Your Workforce? Get the Latest HR Best Practices Today

As you’re deciding to pay remote workers, there are more decisions than whether you should make salary adjustments. Whether you move to a completely remote or hybrid workplace, it will impact whether you need offices, how you maintain your company culture, the technology you use for collaboration, and how you structure your remote hiring process. Learn how to recruit and retain a talented team by signing up to receive expert hiring advice, news, and data from Monster.

Legal Disclaimer: This article is not intended as a substitute for professional legal advice. Always seek the advice of an attorney regarding any legal questions you may have.

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1. Know the law

In some states, it’s illegal to ask candidates about their previous salary history, or what they’re making at their current job. “In states where it’s legal, knowing their current compensation is extremely helpful,” says Colleen Neese, practice leader at the Duffy Group, an executive recruiting firm in Arizona. “In a state like California where it’s not legal, it’s helpful to ask candidates what their salary expectations are, and make sure those expectations align with the salary range for the position.”

2. Discuss numbers early in the process

The offer stage should never be the first time you’re talking about numbers or compensation with a candidate. You should be talking about it—at some level—throughout the recruitment process. This prevents getting too far into a process before you realize that your expectations don’t match up.

“I talk comp every single time with the candidate—the first time I pitch them the job, I talk about it when I telephone interview them, and during the in-person interview,” Neese says. “And it can change along the way.”

Neese is always surprised when she talks to candidates who are interviewing and working directly with companies, and they’ve never talked numbers. “They’ll tell me they’re on the fifth interview and comp has never been discussed, and they get to offer stage, and they have no idea,” she says. “To not talk numbers throughout the process is just mind boggling.”

3. Consider publishing a salary range

It’s not an appropriate move for all job titles, but for some positions, it may save you a lot of trouble to just publish the salary range up front. People for whom the range is too low won’t apply, which will save both of you some time.

The downside is that applicants who might not be fully qualified—but who want the salary you’re offering—will apply. But, in theory, those applicants won’t make it to final interviews if they can’t perform the job.

“Right now, I’m recruiting an accounting manager for one of my clients, and I put the range right out,” says Matthew Burr, a human resources consultant in Elmira, NY. “I’m very transparent with that. There’s no reason to waste anybody’s time. Obviously if it’s a higher-level executive position, that’s a different situation, but for a manager/director/supervisor-type job, I don’t have any issue publishing that.”

4. Consult salary data

If you already have the job at your company, you already know what you’re paying at your company. But what’s the job worth on the market? The more you know, the more you can balance market data against the budget you have for the job—and make sure you’re offering enough to attract and keep the good candidates.

“A smart company will have access to reliable, thorough salary survey data,” says Adam Calli, a principal consultant for human resources company Arc Human Capital. “If you’re looking to get an HR director job in Dallas, Texas, you should know: What does a good HR director go for in Dallas?”

5. Be wary of discrimination

If you aren’t careful, you could end up paying employees unequal salaries. “The statistics will show you that historically, women are less likely to negotiate or negotiate as fully as men,” Calli says. What ends up happening, he says, is that you’ll make an offer to a woman, she’ll accept it, and you’re done negotiating.

But if you make an offer to a man for the same title, and he negotiates for a higher salary, you might pay him more, and that can spell trouble. “If this happens over and over, the men in your company end up being paid more than the women in equivalent positions,” Calli says. “All of a sudden, what you care about is the lawsuit that all the women are bringing.” Be mindful in your dealings that you’re paying men and women comparable salaries.

6. Sweeten the pot with non-salary perks

When you can’t go any higher on salary, there are a variety of things you can throw into the deal that may sway a job seeker. “Extra vacation is always a good one to try if you’re trying to get someone for a lower number,” Burr says. Other options include a signing bonus, relocation expenses, or even a paid parking spot near the office.

Flexible work options are also attractive when you’re in a salary negotiation with a candidate, such as the ability to work remotely, to work off hours, or to take every other Friday off. “The flexibility to work remotely, whether it’s full-time or partially remote is a huge recruiting tool,” Neese says.

A company might also offer to pay for continuing education, additional training, or for the employee to attend national conferences.

7. Consider a trial run

You may find yourself in a position where a candidate wants, say, $90,000, and you think they seem like a great find—but you don’t want to pay more than $85,000. Some companies give a candidate a trial run at the lower salary, with the promise of a performance review after a period of time to see if they’re worth the higher number.

“I usually see a range when this kind of negotiation happens of anywhere from three to six months,” Calli says. “Then I’ll give you a performance review—I’ve seen your work, I’ve seen your attitude, I’ve seen your technical skills. It’s no longer a guessing game.”

This allows both you and your candidate to give the position a try, and for you to determine whether they’re worth the extra pay. “I’ve seen people who didn’t make it to three months,” Calli says.

8. Add bonuses and commissions

If your salary numbers aren’t tweakable, a bonus or commission structure gives you some freedom to be able to pay a candidate more in a good year—or if they’ve earned it—while keeping their base pay within a range.

“Whether you get it is based on your performance and how the company does,” Calli says. “But it’s a way for the employer to say to the employee, ‘Hey, I’m willing to put more money in your pocket if you come in here and perform at a high level.’”

Beyond just the existence of a bonus or commission, you can also negotiate the frequency of payment. Companies might pay bonuses or commissions, quarterly, semi-annually or annually, for instance.

9. Think creatively

The coronavirus pandemic has forced the workplace to perform a major shift to remote work, and many companies have remained remote for the foreseeable future. As employees have more freedom to live wherever they want, companies have more freedom to adjust their pay accordingly.That’s when you could have more flexibility during salary negotiation with a candidate.

“Facebook has seen a massive amount of people relocate,” Calli says. “What they’re saying is, ‘Your home of record will now become a factor as we figure out your salary.’” In other words, an employee who relocates to rural Idaho will make less than the employee who lives in San Francisco.

“This is a major wrinkle,” Calli says. “Companies have always factored in geographic differentials, but usually it’s because they have an office in Chicago and an office in Orlando. But now we’re talking about 35 employees who live in 35 different cities, and now you have to figure out what an appropriate salary is.”

10. Follow up on rejections

If you’ve done your job correctly, there won’t be any negative responses to your job offers, because you’ve been setting expectations and getting feedback from the job candidate throughout the process. But if you’re getting a “no,” find out why.

“Following up to find out why would be critical information,” Neese says. “It’ll be critical information as you move forward with other candidates, and it’ll be critical information for receiving feedback on what went wrong.”

Stay ahead at the salary negotiation table

Salary can be a challenge or a hurdle for winning over some candidates, but it doesn’t have to be a deal-breaker.  For the latest salary negotiation tips, sign up for Monster Hiring Solutions and arm yourself with creative—and winning—salary negotiation strategies.

The post 10 tips for salary negotiation with a candidate appeared first on Monster.com.

Tight compensation budgets are creating talent challenges for recruiters. At the same time, employers are banking on a mix of limited salary increases and “total rewards” to retain in-demand workers. People work for more than just a paycheck, but you’ll need to get creative if you don’t have the budget for the typical raise percentage.

The following 10 tips will help you get your arms around the often-confounding nature of compensation dynamics and pay raises.

1. Know the Average Raise and What the Competition Pays

Before you even start calculating which employees get how much of a pay increase, you need to understand what it will take to reward and retain your top performers. This means getting a sense of the typical raise percentage and what your closest competitors pay, and then determining how much you’re able to increase payroll.

So, what is the average pay raise amount? Raises are typically within the 3 to 5 percent range, although this can fluctuate depending on the state of the labor market. When unemployment is low and employers are hurting for talent, it may take a little more to satisfy and ultimately retain your best workers. Additionally, high-demand professions (such as those in technology) may require generous raises regardless of broader economic conditions.

2. Make the Case That the Average Raise is All You Can Offer

What separates companies with major employee retention problems from those that keep most employees satisfied with middling raises? The answer is honesty, flexibility, and transparency in financial matters.

Some employees have come to understand that a flat 3 percent raise is what is being offered. But, while you should never underplay the importance of salary, employees are staying with their employers for flexible arrangements such as working from home, professional development programs, and other incentives beyond the pay raise they may be getting.

3. Don’t Try to Curb Your Compensation Costs

Though it may be necessary to keep pay increases in the moderate range, your company will get burned in the talent market if you actually reduce raises, especially during periods of full employment. Employers should be mindful that such periods are not the time to trim compensation budgets. Payroll will always be your biggest line item, but your people are your most valuable asset.

4. Use Bonuses Rather Than Pay Raises Whenever You Can

Be generous with bonuses if you’re unable to offer an average raise amount. Employers may choose to reward employees with a bonus rather than a raise, or to supplement a lower-than-expected raise, since bonuses don’t compound over time and offer more flexibility.

Another reason to use bonuses—your competitors are. Businesses have been increasingly utilizing retention bonuses as a way to promote better employee engagement and satisfaction. Top-performing companies tend to pay bonuses more frequently than typical companies, while surveys show that a majority of workers prefer tiered, performance-based bonuses.

5. Be Mindful of Pay Compression

When enticements for new hires cause their pay to exceed that of existing employees, you’re setting the stage for tension in the workplace as incumbent employees feel as though they’re falling behind financially. This occurrence is called “pay compression,” wherein the gap in pay between longer-tenured employees and new hires is compressed to the point where your more-senior employees feel slighted.

It’s important to deconflict your recruitment and retention strategies so they don’t work against each other. This may cause you to take another look at your average raise amount.

6. Watch Out for Pay Inequality in Your Workforce

It’s important to take a step back and take in the broader contours of your payroll when considering pay raises, since even the best intentions can come back to haunt you if they result in questionable pay discrepancies amount your staff. In addition to potential liability for pay inequality, exacerbating differences between haves and have-nots within your organization can also be a culture killer.

7. Seek Counsel Regarding Pay Equity and Salary-Inquiry Laws

Depending on your jurisdiction, you may be facing new laws governing wage discrimination and restrictions on your ability to inquire about past salaries. For example, a pay equity law in Massachusetts requires companies to provide equal pay for comparable work, with limited exceptions for such things as seniority, education, experience, and required travel.

These are important to factor into your retention strategy as you don’t want to inadvertently expose yourself to a lawsuit. If need be, seek outside advice on compliance with applicable laws and regulations.

8. Don’t Rely Too Much on WFH and Flexible Schedules

It’s important to offer flexible work options wherever you can, but know that there are limits and you’ll still need to offer a competitive salary and an average raise to retain top talent. While work from home options were more of a novel benefit in the early 2000s, advancements in technology and the acceleration of telecommuting during the COVID-19 quarantine of 2020-2021 have made these arrangements more commonplace.

9. Total Compensation Statements Can be Persuasive

Using a total compensation (or total rewards) statement itemizing the cost of perks such as health insurance and a 401(k) match, can help boost at least some of your workers’ engagement. If it’s clear, employees will appreciate the package you offer. This statement should fully explain each category of compensation and all employer contributions per category. A lunch session with a handout will be more effective than an email that’s easy to ignore.

10. Beyond the Numbers, Compensation is Really About People

Employees are trying to carve out a life and support themselves (and often children or other family members). Companies have a lot of leverage, so they’re able to do things employees may not like. However, wise employers know that if they fail to offer compensation that’s perceived as fair, employees may use the only leverage they have: looking elsewhere.

Take care of your people and your people will take care of your business—it’s as simple as that.

Are You Retaining Your Top Performers?

Compensation strategies are not a one-size-fits-all proposition. They need to be tailored to your industry and your workforce, whether you’re calculating starting salaries or the average raise amount, but they also need to comply with the law. It can get complicated, which is why we’re here. Find out how to get free access to the information you need, including the latest hiring news, recruitment tips and more.

Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.

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Employers and employees alike are finding that these measures affect salary negotiations and compensation trends in a variety of ways. So, recruiters need to know how these laws and trends might affect compensation strategies during the hiring process.

We’ll provide an overview of pay equity laws, a pay equity definition, and tips for how these laws may impact your overall strategy for compensation.

Pay Equity: Definition

We all understand the concept of equal pay for equal work, but is pay equity on a more practical level? Generally, it means paying employees the same amount for the same or similar work, accounting for each workers’ experience, tenure with the employer, and performance. Conversely, pay equity means that factors such as gender, race, national origin, disability status, or sexual orientation may not be a factor (either intentionally or unconciously) in an employee’s pay.

Federal and State Pay Equity Laws

The Equal Pay Act of 1963 prohibits sex-based wage discrimination for jobs that require “substantially equal skill, effort, and responsibility under similar working conditions.”

State provisions go further in attempting to rectify gender-based disparities. Examples include:

• Massachusetts – The state’s Equal Pay Law bars companies from asking job candidates for their salary history, and says that companies can’t forbid workers discussing their salaries with each other.
• California – The state’s Equal Pay Law mandates equal pay for “substantially similar work” (a broader category than the federal law), and applies its protections to race and ethnicity in addition to sex.
• Illinois – The state’s Equal Pay Act prohibits employers from screening job applicants based on current or prior wages, requesting a candidate’s compensation history, or requiring salary history as a condition of employment.

Although many states have been steadily strengthening their pay gap laws (all but Mississippi have such laws), it may only be a matter of time before federal law catches up with—or even exceeds—some of the more progressive state measures.

Employer Pressure to Rationalize Pay Structures

Although compliance has varied, employers have long been mandated to pay equally for equal work. But some of the new laws require equal pay for “comparable” or “substantially similar” work, and it’s not entirely clear what that means. So, while companies may audit internally to determine whether employees are being paid identically for the exact same job, they need to approach this with more granularity.

Many employers are revisiting their compensation plans in light of state regulations. In California, for example, employers are required to use objective criteria to calculate salaries. This puts a greater emphasis on the position and duties rather than the candidate because employers need to have gender-neutral explanations to point to when pay disparities arise.

The Impact on Incumbent Salaries

Employers in states with stricter compensation equity laws may be required to apply salary offers to job candidates as well as existing employees. So, companies hiring new employees are looking around to determine if they need to give raises to incumbent employees as well.

That door swings the other way, too, as employers rely on existing internal salaries to calculate salary offers. Although this certainly complicates the hiring process, it also gives employers an opportunity to decrease pay disparities and cultivate a more diverse (and, as a result, more successful) workforce. While data consistently shows that companies with a diverse staff perform better, it should be a no-brainer: Top-performing women and other minorities know they don’t have to settle for less.

Pay Equity Laws Leave Less Room for Companies to Maneuver

Employers in states with gender-pay equity measures cannot legally offer female candidates the pay they ask for if that amount is less than the pay of male employees doing similar work. This means these laws can limit employers’ negotiating power with job applicants and limit much of the wiggle room employers used to enjoy.

While most people will see this as a positive development in the struggle to narrow the gender gap, some of these laws might be too restrictive in practice. And, as more states and cities enact additional pay equity laws, the employer’s responsibilities in this arena only get more complicated. For smaller businesses in particular, even good faith efforts at enacting pay equity policies could create additional headaches.

Savvy Candidates Will Negotiate Accordingly

Many of these new laws don’t necessarily guarantee equity of pay offers; but, similar to the shift in power from car dealers to car consumers, they do increase leverage for candidates. Savvy applicants aware of these laws can bring their own information to the negotiation, so you should be prepared to raise the curtain a bit and be open to greater pay transparency.

Younger workers in particular may be more apt to leverage new rights during compensation discussions. Recently enacted pay-equity measures typically give workers the right to divulge and discuss what they’re paid and therefore to use that information in salary negotiations. And since millennials are more likely to discuss salary than the generations that came before them, these workers are especially poised to act on that information.

Make Hiring Decisions With Pay Gaps in Mind

The full effects of pay equity laws won’t be determined until after the measures have been adjudicated in court and by state labor relations agencies. Fully understanding the pay equity definition and making hiring decisions with these laws in mind can help keep audit and compliance costs at bay. Sign up to to receive expert advice, the latest hiring trends, and help with other hiring challenges delivered straight to your inbox.

Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.

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The following observations and tips from engineering staffing experts will get you started on crafting a compensation strategy that can help you hire and retain top talent.

Fierce competition requires comprehensive compensation

In many cities, there are more open listings for engineers than there are qualified individuals to fill them. This means you have to hone your recruiting process and make very intentional decisions about base pay, benefits, and perks related to work-life balance.

Expert tips:

“Engineering candidates are seeking jobs at a time when market conditions are in their favor,” says Jamie Seward, former director of recruiting at Adecco Engineering & Technology. “There’s an increasing need for these specialized skill sets, and the best candidates often have choices on competing opportunities.”

“Demand for talent has increased consistently across all areas of engineering. As a result, we are seeing a lot of upward pressure on base salaries and in more specialized or experienced roles. It’s realistic that a company would offer higher compensation than in the past in order to win over a top candidate.”

Be transparent about your engineering compensation

It’s not enough to map out your compensation options and slide them in as an afterthought at the end of the hiring process. Whether you’re dealing with a software engineer or a civil engineer, show them the respect and consideration they deserve by being up front with what you’ll be able to offer them.

Expert Tips:

“Employers need to look internally at what they’re paying, but also research who else is hiring for the same skill set, and what they’re paying,” says Jay Rogers, vice president at Randstad Technologies. “You need to research — not only to attract new talent, but also to retain your current talent.”

“We recommend that clients are very open about total compensation from the very beginning. Talk about base pay, any bonus potential, paid time off, health and retirement benefits, any stocks and sign-on bonuses. You don’t want to interview a candidate on the phone and then bring them in for 2 or 3 or 4 interviews in person, make the job offer and then find out that you’re nowhere in the ballpark of what they were looking for. It wastes their time and your time.”

“Most everybody isn’t allergic to a little higher pay. Whether you’re working with a recruiter or directly with the candidate, if the candidate says, ‘I’m currently making X, and I’m looking for X+1,’ your offer needs to be equal to or greater than X+1. If it’s less than that, the candidate will be a little upset. Have those upfront conversations and don’t waste everybody’s time.”

Hiring bonuses vs. long-term incentives

In addition to researching market rates and figuring out what you can offer, you also need to consider the types of candidates you’re recruiting. For example, younger workers tend to look for benefits that prioritize work-life balance and career development in addition to competitive base pay. Read up on current trends, know your audience, and adjust your engineering compensation strategy accordingly.

Expert Tips:

“There isn’t enough supply for each job,” says Steven Lewis, former executive director at Page Executive. “The more technical the role, the bigger the problem is to fill the position. The must-have for hiring engineers is a bonus, typically 5 to 15 percent, based on hitting project timelines.”

“It depends on who you are looking for. The millennial generation tends to be more motivated by base salaries, whereas people with more experience are more interested in solid base salaries and good benefits, healthcare, and bonuses. The more experienced engineers are often interested in a long-term incentive or equity, which is a major draw.”

Get creative with your engineering compensation plan

If you’re a small business owner, you likely can’t afford to compete with the base salaries and hiring bonuses of large firms. And that’s ok. Many candidates are also intrigued by skills development, mentoring, the ability to work from home, incentive programs, and an opportunity to work for a company that gives them purpose, among other benefits.

Expert tips:

“Companies are paying much closer attention to budgets for wages and salaries,” says Peter Gault, former president of Gault Staffing. “The market for engineers is becoming tighter and tighter, primarily in the areas of mechanical design and aerospace; as such we’re seeing employers who are budgeting for stronger starting wages.”

“Compensation packages that stand out, especially with smaller firms, include more vacation time, such as three weeks, often available for use after only six months of employment. A growing number of smaller engineering and engineering design firms are getting creative with time-off benefits, recreational benefits, even engaging other local businesses like restaurants, theaters and so on to offer special employment perks. Employers who can provide a stronger balance between work life and home life will likely discover the tenure of their employees increase.”

Consider skills carefully and explain benefits in detail

Before you begin your recruitment process, carefully consider the skills and experience that are truly necessary to do the job well. Ask current employees what they would list as the job’s requirements. Maybe your ideal candidate doesn’t need a broad range of technical skills, but rather would do well with a narrow set of technical skills and a few key soft skills. You could then adjust your engineering compensation package accordingly.

Expert tips:

“An employer will bend on the tech experience if communication skills are strong,” explains Laura Shoults, director of engineering and manufacturing operations at Versique Consulting and Search. “They’re looking at cross-functionality within the organization. Most companies aren’t as siloed as they use to be, and someone with strong communication skills can help with that. Strong communication is also needed for leadership positions.”

“Make sure you’re looking at the total compensation package. Engineers are detailed and analytical, so be explicit about what you consider as your compensation package. Bonus, profit sharing, work-life balance or vacation — some engineers will talk about those in dollar amounts — so a total compensation package is important.”

“Other creative things I’ve seen include covering COBRA costs between a resignation and the date benefits start after hire, and delayed sign-on bonuses that pay out at three months and six months. That’s not just an attractor, but an attractor to stay. Employers should come to the plate with the best offer first. If there’s a negotiation, people don’t feel quite as valued.”

Engineering compensation and your recruitment strategy

Offering a competitive salary and benefits package to today’s engineering recruits is essential, but it’s just one piece of the puzzle. You’ve got to find the right candidates, offer an engaging recruitment experience, and sell them on your company. Get started by signing up for Monster Hiring Solutions where you’ll receive expert recruiting advice and the latest hiring trends.

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As employers look for ways to keep employees engaged and motivated, they may consider using compensation as a tool. But while paying people fairly for their work is important, there’s a misperception that compensation will drive productivity and motivation in the workplace, says Kris Duggan, CEO of Palo Alto, California-based BetterWorks, an enterprise goal-setting software platform.

“A bonus or raise may give someone extra engagement for a couple days, but it’s not going to carry through the rest of the year or change motivation,” says Duggan. Productivity evaluation is essential to distribute salary increases or bonuses, and people development is necessary to get people to grow and improve, adds Duggan. “Conversations about these two things should remain separate.”

With fierce competition for top talent, it’s important to understand the role compensation and other motivations play in productivity. Here’s what you need to know.

Know Your Company Mission
Clarity of purpose can go a long way toward boosting employee productivity, Duggan says. “People do need to be paid a fair wage, and there should be a process inside the company to determine equitable compensation,” but he adds that compensation alone simply isn’t enough for maximizing engagement to boost productivity.

Understanding the company mission and empowering managers to help employees take risks and achieve their goals will help align and coordinate efforts to boost productivity more effectively.

Be Strategic as a Leader
Ken Abosch, a compensation practice leader with Linconshire, Illinois-based Aon Hewitt, says organizations should ask themselves what their strategic intent is when it comes to compensation. Leaders can ask themselves questions such as:

• What behaviors are we looking for from employees?
• What values do we want to measure and evaluate?
• What do we want employees to focus on?

Too often, Abosch says, organizations don’t think about what it is that they want to accomplish. “If all a company thinks about is paying people to show up at work, then that’s what they’ll get — someone just showing up at work.”

Compensation can offer more leverage and potential to help employees focus on what the organization considers important, says Abosch. And leaders can use it to shape behaviors based on the company’s mission.

Abosch adds that for any compensation to be effective in shaping behavior, it must incorporate what he calls a “line of sight.” Employees need to know what they’re being measured on and whether the possibility of reward is within their control.

“The No. 1 thing is to identify measures and factors, and explain them to employees and how they have the ability to impact those things,” he says. “When that happens, you can achieve the productivity or higher revenues or reduced costs, or whatever you’re trying to achieve.”

Reward Employee Development
Compensation can be used as a tool to reward and encourage employee development. For example, when organizations think about compensation, it should be to reward people as they continuously learn, grow and gain in their skills, says Lindsay McGregor, co-founder of Vega Factor, based in New York and Boston, and co-author of Primed to Perform: How to Build the Highest Performing Cultures Through the Science of Total Motivation.

“It’s not going to be possible to use compensation to influence what each person is doing every hour and every minute of the day.”

Instead, people can be rewarded as they improve their skills and abilities, says McGregor. That way, it won’t distract people from why they come to work every day.

“If you’ve tapped into intrinsic motivation and the mission is clear and exciting, plus you offer a fair wage, why wouldn’t people want to work there?” Duggan says. “If you don’t have any of those things, then you’re resorting to bribery to get people to work there.”

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The manner in which you structure employee compensation has many ramifications. It affects employee retention, productivity, and internal pay equity, to name a few key areas. Here are some top considerations on why you should regularly revisit your employee compensation structure.

Pay for performance

Companies should recognize that employee motivation is something that money often can buy. “The performance the employer wants isn’t going to be sufficiently motivated by a modest pay increase,” says E. James Brennan, a compensation consultant in Bellingham, Washington.

Workers appreciate the economic value of a more-than-minimal raise and what it says about the employer’s bottom-line recognition of job performance. Conversely, year after year of meager increases can cause employees to emotionally check out. Think of the cost of a substantial raise as an investment in productivity and employee satisfaction.

Reward them or lose them

While many employers will keep average salary increases in the 3 percent range or less, they should recognize that talent is considerably more mobile than it used to be. Workers often vote with their feet, and employee turnover is costly for any business.

One way to adjust your compensation strategy is to demonstrate to your employees that you value them with all kinds of rewards, from cash to intangibles. Financial incentives, positive reinforcements, company recognition, and employee engagement strategies can all go a long way to increasing employee satisfaction and retention.

Reconcile compensation discrepancies between new hires and incumbents

Beware of bringing in talent comparable to your incumbent employees at significantly higher pay. “Once you find out what the market entry pay rate is for your hiring pool, you have to think about what the impact will be when you put this new hire in the pool where incumbents are making less,” says Brennan. You may need to either adjust that offer for a new hire or consider internal pay raises or incentives.

Educate employees about salary and incentive policies

If you believe in the integrity of your compensation strategy, you should be able to discuss it with your workers in some detail. Employees who understand how decisions are made regarding raises, bonuses, incentives, and the like are less likely to feel that differences in pay are inherently unfair.

This is even more important when it comes to younger employees. Millennials are more likely than previous generations to share their salary information with others, including co-workers. So, it’s especially beneficial to have an open conversation about what aspects of employee performance earn financial rewards.

Close the deal with a signing bonus? Think twice

Signing bonuses can alienate incumbent employees who have stayed with the company through recent years of scant pay increases. If your best candidate or their headhunter asks for a signing bonus, consider counteroffering with a performance-based bonus payable a few months out if goals are met. And offer the same incentive to everyone in the new hire’s cohort.

Mind any race or gender pay gaps

The diverse workplace of the 21st century is no place for demographic biases in pay, which often are illegal. However, they do persist and laws are constantly changing to address the discrepancies. A proactive employer needs to know the current laws regarding employee compensation and should take steps to rectify internal pay gaps rooted in bias.

Make smart compensation decisions when hiring new talent

Your compensation strategy isn’t just a line in your budget. It affects employee satisfaction and retention, workplace drama, productivity, and the law. So, it helps to get it right from the get-go. Get expert advice and hiring tips from Monster Hiring Solutions to start off on the right foot.

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