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Why rate negotiation is critical to saving on payroll costs

Negotiating pay rates with your organization’s contracted resources is essential to achieving savings on payroll costs related to overhead, onboarding and even training, as well as reducing or eliminating the amounts an employer would pay in taxes and benefits for full-time employees.

If you’re responsible for negotiating pay rates with job seekers, you’ll want an actionable plan that will align your workforce with your cost saving objectives. Before extending a job offer, the information below will help provide insights into identifying areas that need improvement in your own negotiating tactics, as well as offer tips for building better negotiation strategies.

Why you could be overpaying on payroll

As with many other payroll misconceptions, while a candidate may be the best resource for a job, they are often not the most cost effective one for the business. There may be a variety of reasons why an employer could be overpaying on contingent labor; the examples below offer insights into those reasons:

When negotiating the job offer, an employer will often agree to a pay rate with the resource if there is room for it in their budget.

An employer is often not always aware of the market rate for specific skills sets, and therefore, may extend an offer with automatic acceptance of the resource’s requested pay rate without challenging it.

An employer does not take the resource’s status into account when negotiating pay rates, impacting the overall payroll cost when extending an offer.

An employer may not be comfortable negotiating with the resource for fear of disrupting the relationship and potentially losing that resource before an offer can be extended.

HR and Procurement departments may both be engaging resources in silos without a streamlined process in place, causing inconsistencies in pay rates for similar labor.

Negotiating payroll costs

As the rise of the contingent workforce continues to increase, 21st century organizations will need new strategies, and the right technology solutions im place, to attract the best non-traditional workers to their business — including negotiating for their work before extending a job offer. 

Negotiating pay rates with candidates before extending an offer can be one of the most daunting aspects of your talent acquisition program, but it’s also one of the most important.

When beginning the pay rate negotiation process with job seekers, employers must enter the negotiation process prepared with knowledge and best practices that ensure a fair, market-based pay rate and offer that’s mutually beneficial to both parties.  

Steps involved in a successful negotiation process

Before extending a job offer, take into consideration the following steps in order to make a mutually benefitting pay rate negotiation.

1. Retrieve the job title and job description from the hiring manager.

2. Retrieve the resume from either the hiring manager or the candidate.

3. Compare the job details and resume to determine correct skill level (Level 1, 2 or 3).

4. Classify the resource under the appropriate job title, skill level and rate card classification.

5. If there is no predetermined job title or skill classification, determine the appropriate category the resource should fall under, or survey market sources to establish rate for new/niche skill set (approved by procurement).

6. Negotiate rate with the resource to ensure rate card compliance.

Importance of rate card integrity in payroll

It’s important to make sure to keep your contractor pay rate card updated every 2-3 years to be reflective of the hot or cold job marketplace; this is the benchmark for your negotiating efforts. While there are cost savings to be had in an employer market, you may need to be prepared to act when the job marketplace heats up overall  and ensure your program is adaptive to these changes. 

It’s also important to remember that resources who possess a core technology plus a niche skill should not be priced in the same bucket as resources who only possesses the core technology alone. Remember, niche or upcoming skills will be priced higher, and your rate card should not limit this.

How can you tell if your rate card needs updating? 

• Increased number turn downs (by the consultant) for competing offers.

• Repeated requests by consultants for pay rates above the max market rate.

• Increased challenges in sourcing qualified candidates.

• Increased demand for the talent you’re sourcing.

• Contract extensions where current rate exceeds previous market rate.

• Experiencing a higher percentage in asks for rate increase at extension.

• Extensions not being accepted in favour of a better offer outside of your organization.

When candidates are consistently coming in over rate card on a particular category or overall, it’s worth reviewing. To combat this, it’s good practice to monitor rates to identify roles that are coming in above rate card and those that are consistently below. This allows companies to consolidate, remove or add new role categories as needs and roles change.

Negotiation tips for employers

Leverage your data

Before advertising any job openings, employers should use talent acquisition data to establish benchmarks on what the organization pays for a specific job. If you already have a rate card, even better. Use it and compare it against acquisition results, paying particular attention to the use of “niche” or “other” worker types.

If you’re using these types of workers, investigate why. This usually means that someone is working around rate compliance, you need to add a new category or you should review your existing rate card to current business conditions. 

Approaching the bargaining table prepared with a framework for dialogue will improve the chances of achieving mutually beneficial relationships with your contingent workforce. Harvard Law School’s Program on Negotiation recently released a free Negotiation Preparation Worksheet to help you create the best framework for your organization. You can download your copy here.

It’s not all about the money! Consider unique candidate motivators

Attractive compensation packages will vary by candidate. When beginning negotiations, it’s important to put the people first and the numbers second. However, employers don’t want to reveal budgets too soon, as once you’ve anchored a number, it’s hard to move away from it. Instead, get an understanding of what’s important to your candidate by asking yourself, “What do they hope to gain out of the role and where is the balance between what they’re looking for and the expected rate?” 

A compensation package that includes things like vacation days and health benefits may only be available for certain worker types, so it’s important to consider creating unique compensation packages that include non-monetary drivers like remote work options post covid 19, a flexible work schedule, exciting project work or using the best and new technologies.

The opportunity to work with cutting edge tools and on the job training with trending technologies over a higher pay rate may be an attractive motivator for contingent workers who want help increasing their marketability in the workforce.

Maintain candidate control with full disclosure

Transparency is critical to help setting clear expectations frequently and early in the negotiation discussions, and you’ll want to set these payroll parameters as soon as possible to save both parties time and frustration. 

It’s important to be transparent with things like:

• Background checks

• Compensation packages

• Deliverable time frames

• Device policies

• Chances for extensions

• Flexibility on work from home options

Setting clear expectations about conducting background checks, required must have skills and specific program requirements will mitigate candidate confusion on things such as why you’re conducting a credit check or why a worker can or cannot use their own laptop.

You’ll also want to be aware of things such as time to hire. Did you communicate that you need a resource ASAP, but have plans to leave on vacation for two weeks time? Errors like these will leave the candidate on radio silence when he or she was expecting immediate feedback. 

Surprises leave candidates dissatisfied about the process, creating an opportunity for a dissatisfied worker to take on a negative perception of your organization, which will affect your brand’s reputation. When 11 per cent of candidates won’t accept a position with a company that has a bad reputation, avoiding surprises in the hiring phase is crucial to attracting talented candidates.

Be prepared to be competitive

Starting hourly rates can change rapidly, especially for high-demand or niche roles involving specific skills. If you’ve identified a gap in the pay rate data you’ve gathered and your budget, consider making adjustments if you can. Just because you paid a certain number for the same role in the past, it doesn’t mean you’ll still find current talent at that price. If your company is not prepared to present a competitive offer, you may wind up with your second or third choice instead of your first.

Take emotion out of the equation

Negotiations are professional conversations, and how you handle yours will make a direct impact on your company’s employer brand and that of your organization. To protect the reputation of both, it’s important to remember to stay calm and not let inflexibility based on pride or emotion control the conversation. Discussing compensation can become personal and emotional, but it’s important to never burn bridges!

An effective recruitment process will always leave the door open for future opportunities, ensuring an organization has continuous access to qualified candidates and isn’t putting all its eggs in one basket.

Analyze your payroll budget

Create an annual budget that helps you better estimate your business income and expenses. The budget should separate types of expenses, like rent, utilities, supplies and contingent worker spend. If your payroll budget is ready to burst, it may not be the right time to to do too much negotiating.

Track your results

Every employer has heard the saying that if you can’t measure it, you can’t manage it. This is no exception. Make sure you track your hiring and the results of the negotiation efforts. What are you finding? Are there certain hiring managers that are less compliant in the company? Are there specific roles that you have less success negotiating with? This is powerful information for your contingent worker program and company to be aware of. 

You’ll also want to even consider job inflation and vanity titles and be weary of those who attempt to negotiate a rate they aren’t actually qualified for. Although a part of the hiring process is performing thorough due diligence on every candidate, remember that job titles don’t always represent a candidate’s actual skill set or experience.

When exploring the different types of contractor payroll models, it’s critical to understand how payroll solutions will help engage proven talent and reduce administrative burden- allowing employers to increase the time spent moving business forward.

RFP Checklist for pre-identified contractor payroll vendor selection

Are you getting the most out of your contractor payroll program? Every organization’s needs are different, but there are several crucial elements to keep in mind when evaluating a contractor payroll program. These include:

  • Infrastructure and expertise
  • Worker management
  • Onboarding
  • Rate management

However, there are other, less obvious criteria that still make a big difference in cost, compliance and satisfaction. 

If you’re evaluating a new contractor payroll provider or would like a tool for assessing whether you’re getting the most out of your current program, download your detailed RFP Checklist for pre-identified payroll vendor selection below:

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