Choose your language:

Hong Kong
New Zealand
United Kingdom
United States

The Art and Science of Setting Rates

In today’s competitive IT talent marketplace, paying people correctly is critical. Therefore, many companies look to technology to assist them in determining what they should pay their permanent and contingent staff. A boom of Web based tools have come into the marketplace that attempt to address this need. While a seemingly ideal solution, digging deeper into how the tools work and how they are populated with data reveals that often they are too good to be true. In fact, relying on technology alone to set rates could put your talent acquisition strategies at risk.

Relying on technology to set rates could put your talent acquisition strategies at risk. 

How do rate setting or benchmarking tools work?

At their most basic level, compensation benchmarking tools aggregate information from varied sources, including job boards, employee surveys and self reported pay rate websites that ask visitors for information related to their compensation. Though compelling, self reported data is often inflated. Respondents frequently reply to questions with information on how they should be paid rather than their actual salary information. While these sources provide information for comparison, there are risk factors to keep in mind when relying on these aggregated slices of data, especially when non-scientific methods are used to capture it.

What should employers consider when looking at benchmarks?

Starting Salaries – There is often a difference between what organizations say they pay and what they actually pay. For rate tools to work properly, they need to have robust, comprehensive data. However, this data is usually unavailable. Further, many companies place the same job descriptions on multiple sites or with multiple staffing agencies, causing rate tools to count them multiple times. Also, not all jobs are posted, as many roles are filled via referrals and networking.

Recommended Action: Leverage a variety of tools to form a general market baseline for targeted skill sets. Set rates that account for candidates’ current pay, their past experience and the degree of strategic impact they will have in your organization. Also, pay attention to how often your company’s initial salary scales differ from the final negotiated price, note the reasons for the disparity.

Salary Components – Many factors should be considered when “pay bands” are created for specific positions. Only taking an average of the low and high pay rates will typically result in an inaccurate depiction of the pay for a particular position. For rate tools to work as expected, the user needs to have a thorough understanding of the job title and description as it relates to the pay scale. Seldom do two companies use the same vernacular and tier systems to describe the same position.

Recommended Action: Do your best to map your job descriptions to rate tool descriptions; but keep in mind that you will never have a perfect match. Some companies standardize their job titles using market tool titles to ensure consistent comparisons. However, it is important that you don’t limit yourself to titles that are too general or that fail to attract the type of candidate you seek.

Time to Fill – Stated rates do not factor the time it takes to fill a role. This is less of an issue for full-time hires because the individuals will presumably be in their roles for many years. For project-based contract positions, the difference between hiring someone in a week vs. a month can have a major impact on a project. In some instances, time can impact salary when it becomes apparent that the initial pay rate was too low, and therefore must be modified. In other instances, the amount of time it takes to fill a roll takes longer than a company is willing to wait, resulting in the open position getting cut or filled via another method.

Recommended Action: Do your best to set rates upfront that reflect the importance and urgency of the role. Additionally, know how long you can wait before you formally re-examine the offered rate.

Quality – Published rates do not factor in the quality of the professional that is ultimately hired. Was the employee a leader with potential or was he under qualified and eventually let go? There is no meaningful way to differentiate the extremely important nuance of quality within a pay rate tool.

Recommended Action: Assess the strategic implications of the role. Do you require an ‘A’ player or are you comfortable settling for someone average? What could happen if you get a high performer in place? How would it benefit the business? Conversely, what are the consequences of a low performer in the role? What would happen if you need to hire for the same position again every year or so? There is significant upside to being highly competitive with your pay rates when you hire for roles where frequent attrition would damage business goals. Balance the risks of higher pay for new hires through clear and thorough performance evaluation and management methods.

Position Evolution – Roles change over time based on need, workload, skill set and other factors. Rate tools do not have the ability to discern how a position evolves over time, and therefore cannot account for the potential pay rate change that would accompany the modification in scope.

Recommended Action: Pay rates alone should not be a strategy. Rather, they should be a critical part of a more comprehensive talent management approach. Since business needs often change over time and employees develop additional knowledge, skills and abilities, positions should evolve to ensure you maximize return on your human capital. Ensure your performance review processes evaluate progressive job roles and responsibilities. Also, streamline the bureaucracy often involved in changing titles, job descriptions and pay scales to accurately reflect new job expectations.

Job Description – Rate programs cannot discern which skills are the most important within a job description. Also, a job description often includes a number of skills that, while ideal, are not available in the local area. As a result, candidates that receive the job offer may not possess all of the original skills described and therefore would be paid less than the original rate.

Recommended Action: Continue to list all desired skills, but prioritize the “must haves” from the “nice to haves.” Identify which skills are necessary for your positions and use rate resources that are a close match. If you opt for different skill priorities than originally planned – which can happen when you find a special candidate – ensure your rate reflects your new direction.

Total Compensation – Compensation is not salary alone. While a pay rate offers part of the information, other variables – like bonuses, stock options, vacation time, benefits and perks – are not accounted for. Some rate tools provide bonus information, but even bonuses are often dependent on individual and company performance.

Recommended Action: Assess the relative competitiveness of your total employee value proposition vs. those of other employers in the market vying for the same skill sets. Do your competitors offer their employees telecommuting, an onsite gym, daycare, discounts and complimentary services? If so, these perks will impact your company’s pay rate competitiveness.

Duration of Assignment – Contract employee pay rates are often 10 to 20 percent higher than full-time employee rates. This increase addresses the risk technical professionals take when they are placed short term and will need to take action to secure future employment when the assignment ends.

Recommended Action: Acknowledge that pay will differ based on timelines associated to various roles. Pay for someone who is on a two-month assignment should be different than pay for a six-month assignment, as the risk associated with accepting a shorter term role is greater. Even full time employee pay can be affected by duration. For example, roles that lack a defined career path can signal a lack of longevity.

Cost of Living – It is difficult to account for cost of living variances. For instance, employees who telecommute are often paid based on the location of the corporate office rather than the employee’s home. Therefore, the pay associated with the particular employee is not necessarily representative of the rates within that geographic area.

Recommended Action: Treat each of your company’s disparate locations uniquely. Be careful about using third party information that paints too broad of a picture related to geographic areas. For example, if a website averages the pay for particular skills in New York state, you would likely be paying too little for New York City but too much for Buffalo.

Competitive Environment – Supply and demand for talent is constantly changing based on a myriad of factors in the local and national market. Skills in high demand always force competition. For instance, if multiple companies from the same industry are looking to recruit the same skills, larger economic factors fade behind the need to hire talent with the right combination of industry knowledge, business acumen and technical skills.

Additionally, highly admired companies in any local market or industry can make it difficult for their competitors to fill jobs at certain rates. When organizations are competing against top companies for talent, they need to pay more. For example, in 2010 Google announced that it was giving all employees a 10 percent raise and other positive compensation adjustments. This created a ripple in the talent marketplace that other local employers had to address.

Recommended Action: Continuously assess the competitive situation in each of your company’s locations to determine how other companies in or out of your industry can impact local rates. Local recruiters can serve as a helpful barometer.

Local Labor Market – National economic news is discussed in averages, aggregating the country’s information. However, local employment data and local economies often differ from national averages, especially when specific industry knowledge is a primary factor in who is hired.

For example, New York is typically regarded as the financial services capital of the world. Major employers include the largest global investment banks. These employers have the financial means to compete very aggressively for top talent; this drives up the cost of labor and creates a challenging environment for employers in other industries within the New York/New Jersey marketplace.

Recommended Action: It is important to pay close attention to your local environment and understand what factors can potentially impact rates. Pay scales should differ based on how many skills inhabit the local market. A high saturation of talent will potentially lower a rate, while hard to find skills by region or location will force greater competition and salary increases.


Relying on online tools or anecdotal information alone can cause a company to miss securing the right people, increasing IT costs through project delays or rework due to the lack of quality talent. While technology offers a good baseline for aggregated information, it is important to know the risk factors involved. Some important variables to consider cannot be quantified.

To attract and retain the best talent in the marketplace, we recommend that you utilize many resources and take the following actions:

  • Become informed about your local market; the competition and what they offer employees; and the supply of talent and what they seek. Create partnerships with a small number of trusted suppliers that have local operations in your key markets. They can help you keep up to date on local labor market trends. This will ensure that you stay competitive as you work to attract top talent.

  • Think strategically in planning for your workforce needs. What roles are most important to achieving strategic goals? How long will you need them? How will they evolve over time? Some roles will best be addressed via a contingent model; others through a new permanent position; and still others through training your current staff. Evaluate the work objectives and build a workforce strategy that best suits your needs. The workforce strategy will then guide the right compensation approach.

  • Remember you are dealing with people, not commodities. The processes for benchmarking and evaluation should respect and appreciate the exceptions to the rules. Matching talent to opportunity cannot be delegated to a science alone. It needs finesse to bridge the gap between science and art.