Companies cause harm when they fail to accurately target the compensation for an open position. Too often the thinking is “let’s play it safe and target the compensation lower and only raise the compensation if we find the perfect candidate.”

I understand where this comes from. Companies battling internal pay restrictions find it difficult to target compensation at market rates. It’s easier to target low and make the argument for higher pay when you have a great candidate in hand. As a recruiter I see this all the time. The crazy thing is - a target compensation that’s too low, forces a company to rely on luck to bring in a candidate who can push the compensation where it needs to be. Most often the result is a prolonged search and candidates who are not as strong as they need to be.

Then again, I’ve also seen the following situation. A position is targeted at $175k base with a 20% bonus. A perfect candidate is identified who’s already making more than that. Too good to pass up, the candidate is reeled in with a package that miraculously appears out of nowhere. A $205k base and a 30% bonus (guaranteed for the first year), and a generous sign-on bonus. While I’m happy they landed a “star” candidate I’m perplexed why we couldn’t leverage that compensation during the search itself.

Typically, quality candidates who command a higher compensation never materialize. Why? Because even though the company was potentially willing to pay more, the lower target compensation kept better candidates from pursuing the job.

Though well-intended, the common approach to targeting compensation is among the most detrimental actions taken during an executive search.

The best outcome occurs when the compensation has been well researched and targeted within the bulls-eye, which is within the market range for the quality and experience level you’re seeking.

Beware of unintended consequences

When it comes to targeting compensation, there’s usually a heavy reliance on guess work and feeling comfortable with the idea of moving the compensation up at a later date. This approach often leads to unintended consequences.

1) Self-fulfilling prophecy. You end up with less than a star and are thankful for keeping the compensation low. “Imagine if we would have paid a “star” rate for this decent but average hire”? It’s likely the average compensation attracted exactly what you deserved. A better approach would have been to target the compensation accurately and putting all your effort in to thoroughly evaluating the candidates to ensure they were worthy of the compensation.

2) Relying on luck to interest star candidates. With a less than competitive compensation, a unique circumstance must exist to interest star candidates. For instance, the position is located in their home town and they’re interested in being closer to elderly parents; they’re currently out of a job and willing to consider jobs they otherwise would not (if anything better comes along the candidate disappears); some unique aspect of the job or company that appeals to someone enough to at least check it out, etc. At the very most only 3% of star candidates might have some reason to take a closer look when the compensation is pegged too low.

3) Missing out on star candidates. How many star candidates might you have seen if you had pegged the compensation accurately from the start? If you’re going to end up paying for a star - why not use that leverage from the very beginning to draw in star candidates.

Raising red-flags.

Compensation that is not market-competitive creates red-flags for talented executives. It potentially tells them the company:

1. Isn’t looking for top players
2. Doesn’t value the position
3. Is willing to compromise on quality
4. Is staffed with equally compromised executives in other positions

Little tricks don’t work.

One way companies try to avoid raising red-flags is to withhold compensation information altogether until the very end. But this is a red-flag in and of itself. Unfortunately, star executives don’t like to play the game where they’re told the company is willing to pay what it takes, but won’t share what their general thoughts and expectations are.

What does it say about a company that’s unwilling to share important details, but expects candidates to bend over backwards in sharing their information? Mediocre players will take that treatment, star candidates won’t.

The importance of hitting the compensation bulls-eye

Clarity about the compensation required to attract the right quality candidates, appeals to talented executives. It sends the message that you are looking for top players, do value the position, are not willing to compromise on quality.

Look at it this way. Companies don’t merely take the word of a candidate about their integrity. Companies look for evidence. They watch the candidate’s behavior and actions. In much the same way, good candidates do the very same thing. They look for evidence, among which, is if the compensation is commensurate with the market rate for such talent.

If, as a company, you consistently land the quality candidates you are searching for with a compensation that is within 10% of the original target compensation, you are hitting the bulls-eye. Bravo!

If, as a company, you end up paying more than 10% above the original target compensation, you have sacrificed good candidates in the process. Regardless if you end up with a good candidate in the end. You’ve definitely missed out on quality candidates because the compensation was not properly established at the beginning of the search to attract such candidates into the process.

Tips on hitting the bulls-eye

1) Have a clear understanding of the quality and experience level you want and need in a position. The greater your clarity, the greater the likelihood of landing the candidate you envision.

2) Conduct an informal compensation survey to determine what “ideal” candidates are currently earning. A survey of “ideal” candidates gives you hard-data.

3) Add in the benefit of goodwill and the cost of any hardships. For instance, cost of living, housing costs, tax rates, etc. must be considered. A $200k salary in Manhattan, Kansas is different than a $200k salary in Manhattan, New York. It’s typical for companies to overestimate goodwill and underestimate the negatives.

4) Base your target compensation on what you’re actually seeking in terms of quality and not based on a two tier approach, where the compensation for the ideal candidate is hidden until one appears.

5) Internal equity and other in-house considerations may play a role in targeting the compensation. As best as possible, align the internal parameters with the demands of the market place, to ensure you get as close as possible to where you need to be.