General Management

Salary talks 101 – Preparations and trust are key

Mastering Salary Discussions: Preparation and trust are key

 

January and february is the time of year when many, both team members and managers get that lump in the chest and a general feeling of discomfort as the annual performance talks and often related salary discussions are getting closer. Doesn’t need to be that way!

 

In this article, we walk you through the steps, and give tips and advice on how to: Prepare, Run and Follow up on these sometimes challenging talks.

 

 

As in the case of any difficult conversation, what we would call a effective or successful salary discussion focuses on listening and empathy to generate the trust and openness that will turn it into an opportunity for both.

 

By taking the time to truly taking in and understand your team member’s needs, you can create a dialogue that leads to productive results. Additionally, it’s important to be open to reasonable negotiation and be prepared to justify your decisions.

 

the Psychology and Nature of Salary Discussions.

 

When it comes to these conversations, it’s important to understand a bit of science behind. Having a firm grasp of the psychology of these conversations can help you navigate them more effectively, while being aware of the significance of listening and empathy can help create a more productive dialogue.

 

The psychology is complex, and three things you need to keep in mind that makes the salary discussion even more complex:

  • First, people tend to be very sensitive about their salaries, so it’s important to approach these discussions with sensitivity and care.
  • Second, people also tend to compare their salaries to others’, so it’s important to be aware of this tendency and try to avoid creating any comparisons during the discussion.
  • Finally, people tend to react emotionally to news about their salaries, so it’s important to be prepared for this possibility and have a plan for how to address it if it does come up.

 

The importance of Listening and Empathy.

In these conversations, all science points to listening effectively and showing empathy towards your team members as the absolute key. These two things can go a long way in establishing trust and rapport with employees, which is essential for productive dialogue around sensitive topics like salaries.

When approaching these conversations, make sure to give your full attention and really listen to what your team members are saying. At the same time, try to see things from their perspective and show that you understand their feelings on the matter.

 

Essential – Preparations

 

While the psychology of salary conversations and the importance of listening and empathy are both critical factors to consider, there are also some essential elements that all effective salary discussions should include.

  • Expectations – Set expectations first of all for yourself. It’s important to be clear about what you’re hoping to achieve from the discussion.
  • Research – make sure to do your research ahead of time so that you’re well-informed about fair market rates and the specific situation of your team member.
  • Finally, prepare for responses – be prepared to respond appropriately during the discussion, demonstrating positive reinforcement, being open to reasonable negotiation, and providing justification for decisions made.

 

In the coming sections we will walk you through the preparations, what to thing anbout in the meeting, and what follow up and documentation you should always do.

 

 

Place & Setting for the meeting

 

Select a place for the talk where you will not be disturbed. Ideally go offsite or to a floor where your closest colleagues don’t pass by too frequently. Do something a little new and avoid holding this talk in the habitual meeting-room where you hold all other meetings.

 

 

 

Research

 

When preparing for salary discussions, it is important to first research fair market rates for the position in question. This will ensure that you are able to justify any salary arguments to the team member, and will help to set expectations on both sides.

 

There are a number of resources available online to help with this research, such as salary surveys and cost-of-living calculators.

 

 

Analyze Performance.

 

Before entering into salary discussions, it is also important to take some time to analyze the team member’s performance. This will help you to identify any areas where they may be under- or over-performing, and will give you a better sense of what their true worth is to the organization. If possible, try to use objective measures such as sales figures or customer satisfaction ratings rather than subjective opinions.

 

Generate Constructive Dialogue.

 

Once you have done your research and prepared your arguments, it is time to start thinking about how you will actually structure the conversation itself.

 

In general, it is best to avoid coming across as confrontational or adversarial; instead, try to focus on generating constructive dialogue that will lead to a mutually beneficial outcome. To do this, start by clearly stating your objectives for the discussion, and then invite the team member to share their own thoughts and concerns. Once you have both had a chance to speak openly, work together towards finding a compromise that meets everyone’s needs.

 

 

During – In the meeting

 

It is essential to demonstrate positive reinforcement in order to maintain a constructive dialogue. Some things to remember:

 

Keep open and be aware of your own behaviors

 

Maybe this goes without saying, but here you need to suppress own negative thoughts and reactions to your colleagues’ words and ways. Use affirming body language, such as making eye contact and nodding in agreement. Use verbal encouragement, such as saying “thank you” or “I appreciate your input.” Finally, it is beneficial to offer specific praise for the team member’s contributions. For example, “Your work on the Smith account was impressive and helped us land the client.”

 

Be Open to Reasonable Negotiation.

 

Another key element of effective salary discussions is being open to reasonable negotiation. This means being willing to consider the team member’s perspective and compromise when necessary.

 

It is important to remember that salary negotiations should never be about winning or losing; rather, they are about finding a mutually beneficial solution that meets the needs of both parties. Try to move it away from becoming just a zero-sum game.

 

Sometimes you may not have much room to negotiate anything close to what your team-member asks for. Then you need to refocus and reengineer the persons perception, just like you would a customer in Value Selling. This way you make other areas and values appear much more important than the immediate paycheck next month.

 

Provide Justification for Decisions.

 

Finally, it is important to provide justification for decisions made during salary discussions. This helps team members understand the rationale behind decisions and feel like they are being treated fairly.

 

Justification can be provided verbally or in writing, depending on the situation and preference of the team member. For example, if a team member asks why they are being paid less than another team member with similar experience, a manager could explain that the other team member has been with the company longer and has taken on additional responsibilities over time.

 

After – Agreement & Follow up

 

After the meeting, establish clear expectations with the team member, and repeat what was agreed. This will ensure that everyone is on the same page and that there are no misunderstandings. Be sure to go over what was discussed during the meeting, what was decided, and what the next steps are. It is also a good idea to provide a written summary of the discussion for the team member to refer back to.

 

Ensure the Team Member is Satisfied.

 

It is important to ensure that the team member is satisfied with the outcome of the salary discussion. If they are not, try to understand their concerns and see if there is anything that can be done to address them. It is also important to follow up after a few months to see how they are doing and if they are still happy with the arrangement.

 

Document the Process.

 

It is important to document the process of salary discussions in order to keep a record of what was discussed and agreed upon. This can be helpful in case there are any disputes later on or if you need to reference something from the discussion. Be sure to include date, time, names of those involved, and a summary of what was discussed.

 

Summary

 

In conclusion, as managers and team leaders you need to use some basic psychology in order to prepare for and respond appropriately to these conversations.

  • By preparations – researching fair market rates, analyzing a team member’s performance, and generating constructive dialogue, managers can set the stage for successful salary discussions
  • During the discussion itself, it is important to demonstrate positive reinforcement, be open to reasonable negotiation, and provide justification for decisions.
  • Finally, follow up after the discussion by establishing clear expectations, ensuring satisfaction from the team member, and documenting the process.

Why does my boss wants me to sell 10 times my own salary?

This discussion often comes up in our “cost of sales” workshops, and we believe it is a great idea for any manager or director to thought through these cases so that you can provide a simple and straight forward answer to the question when it comes.

 

Why is it that companies ask their teams to sell for so much more money than their own salaries. One could think it would be enough just to sell to cover your own cost, couldn’t you?

 

Let us take the Software example: You are working for a great start up B2B SaaS company, the team is great, you believe in both the company and the idea, but  … they ask you to sell for a million, but your on-taget-pay is less than 100k. How can this be, seriously??

 

As you will see, there are many obvious and hidden costs to consider, and by being transparent with your team about where the money goes, you will save yourself potential problems. In this article we will take you through two different examples, one SaaS company and one traditional industrial equipment manufacturer, and compare. 

 

You may also want to download our excel calculator that you can plug your own numbers into the two scenarios. 

 

 

Cash is king. Let us consider two different cases:

 

  • Software have very high gross margins, but cash comes in slow nowadays with subscription and pay-as-you-go schemes.
  • Traditional things, such as industrial machinery are often paid at delivery buton the other hand the internal margins– gross margin– after costs of goods are much lower. 

 

Many recent companies, startups and scaleups, don’t have California-style financing and unlimited resources (you are in Europe). Your company need to be profitable or close to profitable – EBIT wise. This means that your sales need to carry both your own cost and part of the rest of the company’s cost. What is your reasonable quota?
Profitable companies cover costs – a rule of thumb


 

A rule of thumb that often is used to keep a SaaS company profitable is to at least let the value of new contracts cover the sales cost. Or in SaaS terms, the new annual subscription revenue rate (first year ARR), should be higher than the customer acquisition cost (CAC) – (new ARR > Cost of Sales, CAC).

 

This means for the company any new customer must be paid for already during the first year contract (from signing). Otherwise, the company will need external financing to cover while waiting for the second and future years payments.

 

If first year contracts cover CoS, the company can grow with limited external financing, and not be restrained by a systematic cash flow problem for its growth.  

 

A software example

So, what is the reasonable quota, or sales target you should carry?  Lets look at the cost of sales and the money we can expect initially. 

 

For those of you who were in business in the 2000´s – Subscription software – SaaS, has completely changed the game plan. What used to be a 100.000 € initial deal, with annual maintenance of 20.000€ has now become a 3-4.000€ monthly subscription. Over time this is great, but Saas companies struggle to become profitable as payments are pushed int the future.  How do you cover costs with subscriptions only?

 

Looking at the cost of sales – CAC

 

In a software company most cost is personnel related. To sell your product you are using company resources to close your deals .. such as techsales, new features/development, management and admin.  We don’t include some parts – The customer retention or “customer success” team manages customer service and support, and drive usage of your product so they carry their own cost.  

 

Without going into any great detail on what may the case in your company, it will probably be a good rule of thumb to think that you carry yourself and 3 – 4 more people in the company – so If you sell for about 4-5 times the average employee cost you are all right.

 

The real cost for any of us employees, is around 1,5 – 2 times our salary, we end up with a reasonable quota at roughly 10x the base salary. This includes social security fees, indirect taxes, the office space you use up, medical insurance, meal tickets etc.

 

Example

 

Let’s have a look at the following example, if your salary is 60kEUR, your total cost is around 100kEUR, and the reasonable quota is 450kEUR-600kEUR . If your salary is 100kEUR, you should not be surprised if your quota is 800-1.000kEUR. Why?

 

Why is 4-5 times your cost, (or 10 times your salary) a good rule of thumb?

  • One (1x) is to cover your own cost to the company (100k)
  • One (1x) is to cover other direct new sales costs, Presales activities, free Consultancy, proofs of concept, development adaptations etc
  • One (1x)is to cover other overhead and indirect sales costs, your sales director, your marketing personnel, a part of admin, all more or less involved in new sales. 
  • The final (1x to 2x) is to ensure some margin for the Company and to cover risk. (the risk that not all colleagues make their quota)

 

Needless to say, we are oversimplifying the matter. In the companies I have worked it made sense for me and my team, under the circumstances I described above. The ratios can vary.

 

For example, if the company is investing heavily in sales and marketing quotas are higher. If the company is spending you job gets a lot easier, but at the same time your sales need to cover a higher cost.

 

In your company the logical figure may be anything from 3,5 times to 9 times cost, or 7 to 18 times your salary. It is normally stable, so when you figure out what the logical ratio is for your company, then you can use that as a benchmark for the future.

 

 

 

An example for Industrial Products

In our traditional B2B example, we apply exactly the same reasoning. In this case the product has an internal margin that can vary, and this margin is what need to cover the CoS plus any extras. 

 

Example 

 

You sell industrial equipment that is produced elsewhere. The cost when delivered to your warehouse is 65% of List Price, leaving you with 35% to pay for your team’s cost of sales. 

 

Let us assume that the sales effort is the same, which means that for every sales person you need one Presales engineer, and on average one Backoffice position. To this we add one for management Overheadand office etc. Finally, we add one to cover for the internal margin, and risk that any territory fails.

 

In this example your pay remains 60k€/year – that give a total cost 100k€ per person. That makes 300k€, plus internal extra of 1-200k€.

 

  • This 500k€ must be covered by the internal margin after cost of Goods.
  • Total cost/internal margins from factory =  400k€/0,35 = quota of 1.143 k€
  • The pure cost is 300k€, so if you sell for less than 300k€/0,35 = 857k€ your local unit will present losses! 

This means that you probably should have some mechanism that starts paying at 850k€, and pays full On Target Earning at 100%.

 

Conclusion

 

You have seen two examples, with similar input, but with sales expectation that become different due to the cost structure that supports sales.

 

When you look at the minimum quota it is helpful to use the cost perspective to discuss around when and why the company would lose money from selling, to avoid this from happening. In buoyant markets, and when you have strong financial backing your criteria and therefore the calculator may be completely different.

We have developed the two examples in the simplified calculator you are free to download here. It is provided as is, and with no guarantees, but use it and inspiration froryour own calculations and methods.

Let us know if you want help building a similar case for your own company and we will be happy to create a customized tool for you.