Hiring/terminology salary basics for mid-large size employers (~100+)
Before we start, here is some terminology that Finance, HR and Recruiting/TA (Talent Acquisition) use that help explain some of the process that goes into recruiting. This is going to assume a basic understanding of business structure in terms of cost centers, budgets, and organizational structures. The point at which a company starts considering the implementation of these processes/tools varies, based on size, where they are in their business lifecycle, industry (ie some industries have much stricter legal compliance requirements such as healthcare or finance), cash flow/investments, variation of products/services. Most tools/services vary from spreadsheets to cloud-hosted systems that charge subscription fees. The very first thing to understand is that finance considers people *no differently* than any other fixed physical capital expense, such as equipment, supplies, or real estate. When drawing up an annual budget (for the purposes of HR this includes raises, new hire salaries, bonuses/equity, and benefits as well as equipment and physical space), finance is the first and final arbiter of resource planning. New hires, raises, performance incentives, and all downstream approvals are all based on budgets. ‘People’ as a resource are differentiated from other types of expenditures as ‘position numbers’. Position numbers are fixed placeholders within an employer budget tied to the operating costs under a specific organization (usually either a specific business unit or a vertical such as operations, sales, marketing, product development, etc). Without an approved position number, new hires (either internal or external) do not exist. Position numbers are to track employees, and there is a 1:1 ratio of employees to position numbers. New position numbers may be added during the course of the fiscal year, but that requires approval from finance and leadership (C-level/SVP) and a business justification from the hiring manager and his/her management team. New position budgets are based on a number of factors including existing employees, growth projections, and overall business strategy.
Headcount: this is the total number of positions approved in an annual budget for an organization. Headcount includes every employee from the CEO to the receptionist or janitor that is an employee on the company’s payroll. When a Reduction in Force (RIF, or ‘layoff’) occurs, this means that the headcount and position numbers are being eliminated completely.
At the beginning of an organization’s fiscal year (which is NOT necessarily the same as a calendar year), new (added) headcount is approved, and may be approved to open during specific times (for example, midway through the fiscal year, like the beginning of Q3 or May/June for a fiscal year that matches a calendar year). This is often done in conjunction with closing or suspending unfilled positions from the prior fiscal year, and involves an intense assessment between HR, TA, and finance as to why a position is still open at the end of the year. Often the fourth quarter is a time when companies either scramble to fill open positions or start closing unfilled openings.
Finance, HR, and TA track the budget and headcount numbers via databases which allow for reporting capabilities and information management. The system that tracks employees is called an HRIS, or Human Resources Information System. It tracks all expenditures related to employees including compensation, paid time off, performance reviews (raises/bonuses), and benefits. (All of this information is purely from a financial tracking perspective, all tied to budgets.) The HRIS may be a module in a greater budget management system, or a standalone system. The most important aspect to understand that it tracks the 1:1 approved position to budget allocation. TA (Recruiting) uses and additional system, called an Applicant Tracking System (ATS), to manage the workflow of hiring one person into one position number. When a position is opened (whether it is a new position, meaning it has not existed before or a backfill meaning someone was in the position and no longer is), the system generates a sequential number for the purpose of filling that specific position *one time*, which is called a ‘requisition’; this requisition number is generally referred to externally as the ‘job number’. If the position (number) is filled then reopened, a new requisition/job number is assigned; they are not generally reused. The ATS is different than the HRIS, and may also be either a standalone system or a module. The major difference in the HRIS vs. the ATS is that the ATS has two ‘views’: the requisition view, and the candidate view. Unlike the HRIS which has a distinct 1:1 correlation at all times, the ATS has a 1:many capability for the majority of the time a requisition is open, until an offer is made, accepted, and processed. At that point, the information feeds back into the HRIS with the 1:1 person filling the position number.
The budget allocated for a specific hiring manager at the beginning of a fiscal year is determined by the existing employees (number, skill set, seniority), existing and projected workload (increase or decrease of the team, organizational changes such as merging groups or even splitting teams.) At this point finance, HR, and Compensation (which is generally a part of HR) collaborate on the specifics of labor budgets (employee compensation). This includes: salaries (new and existing), bonuses, equity (if it is part of compensation). Compensation uses a specific tool called a ‘salary survey’ which is an aggregated database that takes into account factors such as size of company, geography, industry, and title (usually initially based on the US
B /><a href=https://www.bls.gov/ooh/> Department of Labor occupational handbook</a>). Companies pay subscriptions to have access to this data, and they also self-report annually.
*When you go to a website like <a href=’https://salary.com/’>salary.com</a> or <a href=’https://payscale.com/’>payscale.com</a> looking to research salary information, the information provided is based on the same data.
When the compensation data is aggregated, one dataset that is generated is ‘internal and external equity’, which -simply put- is the comparison of salary numbers between existing employees ("internal equity") in a specific group, business unit, and the company. ‘External equity’ is the comparison of the same factors with external information (gleaned from the aforementioned salary survey).
Once all the salary data is aggregated and defined, THEN salary ranges and compensation elements are defined for new hires. It takes into account projected raises for existing employees as well as the competitive numbers externally.