Tips for Negotiating Salary with Your Employees

Employers benefit from having both formal performance review and compensation review cycles. Many companies have a semiannual performance review cycle. One of the two reviews often coincides with the normal annual salary review while the other is used sparingly for special or off-cycle salary adjustments. This formal process is helpful because it allows the employer to do the following:

  • Establish a regular schedule the employer and employee can use to prepare for discussion and negotiation.
  • Communicate the employer’s commitment to engage in a negotiation.
  • Minimize the number of off-cycle negotiations and adjustments.
  • Set expectations about the employer’s important business objectives and the rewards that correspond to meeting or exceeding those objectives.

Preparing for a Salary Negotiation

Employers face negotiations with employees in all aspects of the relationship, but two types of negotiations are particularly important: the first occurs once, upon hire, and the second occurs at each subsequent salary review. Assess the candidates or employees with regard to the following considerations.

  • Competence
    How capable are the employees in performing the job? Assess their ability to perform the specific functions of the job effectively by reviewing past performance, if applicable. Also consider whether they have the experience, skills, and competencies you require.
  • Compatibility
    How well would they do the job here? Assess their ability to interact effectively with customers, suppliers, and other employees. Also, assess their abilities to develop a positive impact on the desired results.
  • Compensation
    Will they perform the jobs for the pay levels we deem to be appropriate? Assess your organization’s ability to attract and retain the caliber of talent necessary for business success within the job’s market range. Will they be difficult to replace? Candidates and employees who review favorably against these considerations may warrant higher placement within the pay range for the job.

Performance Management as an Effective Negotiation Process

Employers can negotiate effectively with employees when the process is based on performance management. Employers can collaborate with their employees by communicating important business goals and the rewards associated with achieving results.

The benefits of this collaboration are as follows:

  • Employees know their employer’s performance expectations.
  • Employees develop ownership for meeting or exceeding performance expectations. Both employer and employees can agree in advance what the rewards will be depending on actual performance outcomes.
  • Communicate a clear understanding of how employee performance will be measured in the coming year.
  • Establish three to five reasonable, measurable goals with each employee at the beginning of the performance year.
  • Agree on what the salary increase and incentive award will be depending on actual performance outcomes.

Ten Negotiation Pointers

  1. Do not withdraw from an employee who initiates a negotiation.
  2. Employees who approach employers to discuss compensation may be concerned about more than just pay. Be sure to look for sources of dissatisfaction other than compensation—but do not ignore compensation.
  3. Open communication generally helps build morale. Many employers find that bad news that is well communicated is much better for the environment than bad news that is not discussed at all.
  4. When discussing salary issues with an employee, make sure it is a discussion with both parties talking. Solicit employee input.
  5. Discuss your views. Talk about recent performance and expected future performance, as appropriate.
  6. Although many aspects of the employment arrangement are negotiable, most employees focus first on cash compensation.
  7. While cash compensation is an important element of the employment arrangement, other important considerations include scope of responsibility, degree of autonomy or authority, and noncash compensation. Do not ignore or underrate these means for satisfying the demands of an employee you seek to retain.
  8. The section on benefits and perquisites can be helpful in framing a discussion of the benefits offered to an employee.
  9. Employers should focus on benefits and perks that are valued more highly than it costs to provide them.
  10. Thank the employee for talking with you about the issues.



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