5 Steps to Determining Salary for Employees
New business owners find that tight labor market salary choices can be challenging. To be competitive, you need to pay people fairly and attract great talent. On the other hand, salaries are an investment on which you need a return if your business is going to be viable in the long term. Breaking this challenge into five key steps can make it manageable.
Set an Upper Salary Limit
The first step in deciding how much to pay employees is knowing what the job is worth to you. That’s the upper ceiling of the wage or salary. It involves answering for yourself how much value you expect a position to bring to your company.
If it’s a sales or fundraising position, the answer to this can be a simple monetary value. For example, if a staff role adds $400,000 in revenue in any given year, an annual salary of $100,000 with commissions could be appropriate.
Other staff who don’t directly generate revenue can still save money—knowing the amount you can’t afford to lose by leaving a job empty makes it easier to set its upper salary limit. This is an excellent way to get started on setting wages for administrative or support positions.
Calculating the value of an IT position, for example, could involve:
- Pricing out how much it would cost to set up each node in a Windows network
- Include the cost of up-to-date data security and the installation of any software solutions
- Include the cost of training staff members to use the network and software properly
- Multiply by the number of people expected to use the network regularly
The final total is the real value of the IT job. This doesn’t need to be your starting offer, necessarily: you do want to leave room for raises over time as your hire gets settled into the business, its team, and its culture. But it’s the maximum value of the position.
Sometimes, calculating a job’s value might reveal that you’ve already been overpaying. In that case, you can adjust your maximum salary downwards when rehiring for that position. That lets you eliminate applicants whose expected salary is too high for your needs.
Set a Lower Salary Limit
The second step is knowing a job’s value in the general marketplace. This helps define the lower limit of what you should be willing to pay. It’s ultimately about understanding the expectations that candidates will bring to the role.
Market rates don’t necessarily reflect the objective value of a job. The value of a knowledge worker or skilled writer is typically underpriced in the current market, whereas the average CEO salary is often overpriced. Still, market rates are the guidelines most applicants for a job will use to define their minimum pay expectations.
There is a range of sources you can use to work out the market rates for a job:
- Research average salary ranges through a reliable job search site
- Network with other business owners through your local chamber of commerce or other groups
- Pricing a temporary staffer for an administrative job through a temping agency and basing a permanent position salary on that cost (minus agency overhead but factoring in benefits)
- Consult recruiters or headhunters for advice on higher-level positions (those interested in working with you on a formal hiring process may well provide a bit of pro bono guidance)
Get a picture of the current market rate for the job you’re doing, and you’ll know the minimum of what any serious candidate will be asking. Your job should either meet that minimum standard or offer some striking alternative benefits if it doesn’t. In general, to attract the best hires, the salary you offer should strike a happy medium between market rates and your salary ceiling.
Decide on Your Payment Model
You can pay workers in different ways depending on what the job involves. For some positions, a fixed salary makes the most sense. For others, an hourly wage or even a commission might be the better choice.
Picking a payment model should account for a few factors:
- A flat salary is typical for white-collar workers and managers
- Hourly pay is a common expectation for temps and for some consultants and blue-collar jobs
- Hourly pay is best suited for work directly related to time (such as production on an assembly line or shifts in a restaurant)
- Pay by commission is suited for work that’s focused on generating a specific amount of revenue
There are overall market standards not just for how much some jobs pay but also for the specifics of how compensation works. For example, most sales positions combine either a low hourly wage or a nominal flat salary with work by commission. It’s legal in most states for server staff in bars or pubs to work for below minimum wage in exchange for tips.
Whatever approach you decide on, it’s always a good idea to have explicit company policies on issues like raises, method and frequency of compensation, and dispute resolution.
Decide on Bonuses and Other Incentives
A job can offer monetary benefits beyond the base wage. It can also offer less tangible benefits that go beyond monetary compensation. Both can be factors in attracting the best talent.
One common way to provide some added motivation for salaried workers is to offer bonuses to people or teams who meet specific revenue or project timeline targets. When people feel like they’re having a positive impact on the company, these kinds of bonuses can be a great motivational tool. Offering them is a way of assuring candidates that your company rewards exceptional work.
Intangible incentives can be just as powerful, including:
- Flexible hours and time off
- Casual dress days
- On-site amenities like child care or a wellness center
- Remote work (this one is increasingly popular)
- Access to training and professional development
Employers who think creatively can give employees a reason to care about and connect with the business. Having people in their jobs who want to be there and are excited about meeting their goals is always worth it. That makes it worth the effort to think creatively and liven up your compensation package with a few extras.
Customize the Deal to the Individual
As you begin the hiring process, the final step is thinking through how you should apply the basic parameters you’ve set. Each candidate will bring their own specific skill set, personality, and reputation to the table. In some cases, this can impact the wage or salary you’ll want to offer.
For example, a sales associate with a strong reputation and intricate knowledge of the local community might be worth paying well above market rates. That may be likewise true of an IT hire who brings expertise with a specific kind of software solution that your business needs to get up to speed on quickly. Particularly high-powered experts will come with their own expectations based on market rates and previous performance with other companies.
If you’re hiring for an upper-level executive position and your company is publicly traded, traditional advantages like stock options may come into the picture. You can expect salary and bonuses to be highly negotiable. The process should include a detailed conversation about short- and long-term targets and performance expectations.
It’s not just experts and executives who may merit the personal touch, though. For a small or medium-sized business, having the best people you can find in even the “smallest” jobs can be critical. Always be prepared to look for specific ways, large and small, that you can entice and retain top talent when determining salary for employees.