- Establish employee salaries that are in line with industry averages and competitor rates.
- Keep in mind your budget, benefit options and employee expectations.
- Give inflation-based and performance-based raises.
- This article is for business owners who want to know how much to pay employees.
If you want to attract and retain the best workers, you need to make sure you pay competitive salaries. At the same time, you don’t want to lose money by setting unreasonably high salaries. To find a good balance, you’ll need to weigh employee compensation expectations against your budget and other factors.
How to determine employee salaries
To determine the appropriate salary for each employee, set a range for how much an individual in a given position should be paid. Where each employee falls within that range will be based on the expectations you have for those employees and their past work experience. Although it takes more effort and time to determine salaries for brand-new positions, after you’ve established a salary range once, you’ll be able to use it as a starting point when hiring more employees for the same or similar roles.
Here are four best practices for determining employee salaries.
1. Do your research.
To attract and retain top talent, your employee salary range for a particular role should be on par with what other companies are paying for that position. If you have connections in the industry, you can start by consulting them to gain insight into compensation amounts. Next, review job listings and career boards, such as Glassdoor, Indeed or LinkedIn, to see what the nationwide average is for that position in your industry.
It’s also helpful to narrow your research by location as that will play a role in cost of living, which can affect whether an employee views your salary offer as realistic and acceptable for where they live. For example, someone based in a large city will likely want to be paid more than an employee with the same position in a small, rural town because the cost of living is higher in the city. You should also take into account the level of experience employees come to the table with as seasoned professionals will require higher salaries than entry-level workers.
2. Choose a realistic and affordable salary range.
Once you’ve identified the average salary for the given position, you need to assess your business’s finances to determine a realistic amount you can afford to pay an employee in that role. The salary you settle on should be within the average industry pay range and take into account cost of living, but it shouldn’t cost you more than you can afford.
To find this sweet spot, consider how much money the employee will be bringing in (or saving) for your company in their role. That can offset how much you’re doling out in pay. After you identify the maximum salary you can reasonably afford, you can securely go into salary negotiations with a number in mind without the risk of going over budget.
3. Offer competitive benefits.
Providing a competitive salary is important, but employees expect more than just a paycheck. The best companies also offer their staffers flexible benefit plans, such as robust health insurance, retirement savings options, health and wellness perks, job flexibility and professional development opportunities. [Consider these top employee retirement plans to bolster your compensation package.]
To secure the best employees, you should supplement their salary with unique job benefits and perks and a desirable company culture. This is especially critical if you don’t have the financial means to offer the highest salary but still want to provide a great total compensation package.
4. Discover job applicant salary expectations.
After establishing a position’s salary and benefits package, find out if the candidate for the role has salary expectations that fall within your budget. You can discover this through effective interviews during the recruitment process while steering clear of illegal interview questions. If every applicant wants a salary that is way above your range, it may be time to reassess your own expectations or financial means.
If a highly desirable candidate’s salary requirement is only slightly out of your budget, you can highlight the additional compensation offered through your benefits package. For example, maybe you provide unlimited paid time off, remote-work options or a 401(k) match. In the applicant’s eyes, these could make up for what your employment offer lacks in salary.
Keep in mind, however, that you want new hires to be happy with their salaries. Don’t try to lowball candidates and then pressure them into taking the job, as they will likely be unhappy in the long run. Employee satisfaction is often linked to higher productivity and lower employee turnover rates, so it’s vital workers feel they’re being appropriately compensated for their work.
What’s included in calculating employee compensation
To calculate annual employee compensation, consider all forms of payment the team member receives. Do you provide bonuses, allowances and medical insurance? You need to factor in these benefits when calculating an employee’s overall salary.
For example, let’s say you’ve decided to hire a human resources (HR) person to lead your HR team. In that case, you’ll want to research the average annual salary range for HR managers. According to Indeed, this range is $54,000 to $110,000. You might have the budget to pay an HR manager $70,000 per year and though that’s good, it isn’t great. Other companies can likely pay this person more.
However, if you’re committed to paying quarterly bonuses of 3 percent — 12 percent over the course of a year — that’s a salary of $78,400. Plus, you may be providing other types of compensation, like allowances to cover their travel for HR conferences, essentially giving them a free getaway.
If you also offer substantial employee health insurance benefits — low deductibles, a wide array of participating medical practices and more — you’re further increasing the value of the compensation package. For these reasons, it’s vital to not only calculate every aspect of a salary but also make clear to the employee what their total compensation is. Note that hourly rates for nonsalaried employees are slightly different and thus your calculation will be too.
Did you know?: Net employee salary typically includes base salary plus any allowances, bonuses and medical insurance.
Other considerations when setting employee salaries
Here are some other points to keep in mind when determining an employee’s salary.
Mind your finances.
You need to set a realistic budget for each new position and keep all new-hire salaries for that position within your predetermined range. As part of this process, business owners must decide if they want to be known as an employer who pays top wages for top talent or an employer who pays base wages (under midpoint) just to get someone to take the job, said Laura Handrick, owner of Laura H Consulting.
In addition to looking at employee salaries individually, be sure to keep track of your overall compensation expenses for your entire team. How much of your organization’s budget can you devote to personnel costs? Will adding a particular benefit mean cutting back in another area of your business? While salaries should be set on a role-by-role basis, don’t overlook the cumulative financial impact on your company.
Raise employee wages when you can.
As employees continue to work for your company, they will expect bonuses and/or raises. Make sure to set starting wages that you can realistically increase over time based on inflation and performance. You may even want to increase a new employee’s wages after a three-month trial period ends or offer company-wide increases once a year to account for inflation.
Pay attention to your hiring cycle, as that may affect your need to raise wages as well. For example, Grant Aldrich, founder and CEO of OnlineDegree.com, said business owners should change salaries based on turnover. If turnover is high, you may want to raise wages to increase employee retention. [Get tips for improving your hiring process.]
It’s also time to give employees a salary increase when they’ve performed at a higher level for a sustained period of time or when you have to pay new hires more to get them on board for a preexisting role, Handrick said.
“You don’t want to have existing employees earning less than new hires in the same job, as you’re likely to end up with disgruntled employees at the least and may end up on the wrong end of a discrimination lawsuit if the existing employee is in a protected class (female, minority, over 40, disabled) and the new hire is not,” Handrick said.
Key takeaway: Give employee raises based on inflation and good performance, but make sure that doing so doesn’t put your company in financial jeopardy.
A great salary can jump-start great employee contributions
When you successfully walk the tightrope between sticking to your budget and paying employees what they’re worth, great results are all but inevitable. For starters, providing ideal salaries means your company will be an appealing place for team members who want their efforts to be reflected in their pay. Alongside that, when you budget appropriately for compensation, you’ll have the money you need to keep pushing your organization toward long-term growth and sustainability. The better your business gets, the better you’ll be able to reward staffers too.
Max Freedman contributed to the writing and reporting of this article. Source interviews were conducted for a previous version of this article.