Bringing on top talent is tough. With nearly 3.5 million employees quitting their jobs per month, you might notice more candidates negotiating salary increase. Why? Because they can. Job seekers aren’t afraid to explore other options if you can’t provide the salary or benefits they want.
Salary raise negotiation might make the difference between a valuable candidate working for you or moving on elsewhere.
You don’t have to be a lawyer or arbitrator to successfully know how to negotiate an increase in salary. But, you do have to do your research, be willing to work with the candidate, and know where to draw the line.
Negotiating salary increase tips
Becoming an employer both eliminates and adds responsibilities. You need to be prepared for running payroll, interviewing candidates, and negotiating pay.
Don’t count out salary raise negotiation even if you offer a generous compensation package. One study found that 55% of candidates try to negotiate salary. And, 70% of hiring managers expect to negotiate pay.
If you take too long to negotiate with a potential employee, you may miss out.
On the other hand, you may offer something that is too high for your payroll budget if you rush the process.
So, what should you do if you extend a job offer and your candidate counters it? Use the following salary negotiation tips to help you hire the right employee for your small business.
1. Do research
After a candidate gives you their counteroffer, don’t respond right away. You may need to do research to find out if their counteroffer is reasonable.
Gather information on:
- Minimum and maximum salary ranges for the type of position
- Average salary for the position in your area
- What you pay current employees
- What the candidate brings to the table (i.e., experience, education, knowledge, and skills)
- Minimum and maximum salary you are willing to offer a candidate
Before appeasing the candidate and giving them the salary they want, think about whether it’s reasonable. Is the candidate asking for too much for their value? How does the candidate’s pay request compare to what your current employees make?
To streamline this step in the negotiation process, do research before you extend a job offer. That way, you don’t need to keep the candidate waiting while you think about their counteroffer.
2. Analyze your payroll budget
How much can you afford to spend on payroll? If you don’t know the answer to this, you shouldn’t start negotiating salary increase with a candidate.
Create an annual small business budget that helps you better estimate your income and expenses. The budget should separate types of expenses, like rent, utilities, supplies, and employee wages.
If your payroll budget is ready to burst, you may not be able to do too much negotiating. Hiring a top employee can have a high return on investment (ROI). But, you don’t want to dig your business into a hole if you can’t afford the candidate.
While analyzing your payroll budget, also consider additional expenses. Higher salaries typically mean more payroll taxes. For example, a higher salary means you must pay more for the employer portion of Social Security and Medicare taxes.
You should also think about higher overtime wages when negotiating salary increase. If the employee is eligible for time and a half, their overtime wage rate would be higher.
Example of additional expenses
Let’s say you offer a candidate $35,000, which is approximately $16.83 per hour. They ask for $42,000, which is around $20.19 per hour.
If you pay the employee $16.83 per hour, their overtime wage rate would be $25.25 ($16.83 X 1.5) per hour. If you pay the candidate $20.19 per hour, you would need to pay $30.29 per hour in overtime wages.
You need the nonexempt employee to work five hours of overtime per week. There are 52 weeks in a year.
Under the $35,000 salary structure, you would pay the employee $6,565 ($25.25 X 5 X 52) in overtime wages. With the $42,000 salary request, the employee would earn $7,875.40 in overtime.
In addition to the $7,000 salary increase, you would pay an additional $1,310.40 ($7,875.40 – $6,565) in overtime wages.
A $7,000 salary increase would also increase your Social Security and Medicare tax liability. You are responsible for paying 7.65% of the employee’s wages toward Social Security and Medicare taxes. A $7,000 salary increase would increase your employer tax liability by $535.50 per year for Social Security and Medicare taxes.
Based on this example, a $7,000 salary increase would cost you $8,845.90 ($7,000 + $1,310.40 + $535.50).
A salary increase may also increase other liabilities, such as state-specific taxes.
3. Respond to counteroffer
The next step of negotiating pay is to either accept, adjust, or refuse the candidate’s counteroffer.
If you accept the candidate’s counteroffer, your work is likely done. If you refuse the candidate’s counteroffer without considering a salary increase, your work is also done. The candidate can either choose to accept or decline your original offer.
Responding to a candidate’s counteroffer may not be the end of the negotiation process. If you adjust the offer, the candidate may issue another counteroffer.
Consider including wiggle room when negotiating salary. You may also put together different compensation combinations when responding to a candidate’s counteroffer.
In addition to a salary change, you might adjust benefits like:
- Ability to work from home
- Retirement plan contribution amounts
- Flexible scheduling
- Employee stock options programs
- Amount of paid time off
If you can’t afford to offer what your candidate wants, get creative. Combine different benefit options to determine what the candidate would find most attractive.
4. Know when to walk
After comparing the candidate’s value to their desired salary, you may find that they’re being too greedy. Or, you might determine that you can’t afford to hire the candidate.
Whatever the case, you need to know when to walk.
If the candidate’s salary increase would break your payroll budget, don’t stress yourself out trying to make it work. Be honest with the candidate and let them know when you cannot negotiate.
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This is not intended as legal advice; for more information, please click here.