How to decide how much to pay your workers?

In a Glassdoor study, 67% of job seekers cited salaries to be the top factor influencing their decision to take up a job or not. It is a known fact that paying well enables employers to attract top talent and keep them around longer. The question, “How much do I pay to my workers?” crops up for all business owners at some point in time. While you would want to pay competitive salaries, you would also like to stay within the budget. 

This makes calculating the “right number” a fine balancing act. Relying on guesswork is a sure way to suffer the consequences of either running huge overheads or hiring below-average talent. So, take out the guesswork and follow these tips to decide how much to pay to the workers that make both you and your workers happy. 

1.Create an accurate job description – This is the first thing you must do when deciding how much to pay your workers. Make sure you write an accurate job description that includes the core job duties, skills needed, and the experience level required. Keep the job title generic so you can compare it to other similar roles in the industry.

Salaries reflect the value a job adds to your business. For instance, a sales manager brings far greater revenue than a front-desk receptionist, so paying extra to an experienced sales manager makes more sense than hiring an expensive front-desk receptionist. 

2.Research the average pay – Find out what other businesses in the market are paying for the particular job role. Use the following criteria to benchmark against other companies: 

• Job requirements
• Size of the business
• Geographical location 

The easiest way to find out what others are offering is by checking classified job ads in newspapers or online. Review job listings and career boards on Glassdoor, Indeed, and LinkedIn to see the nationwide average for the job position in the industry. Many job ads mention an approximate salary range, if not the exact salary amount. You may even leverage your network in the industry using the following informal methods: 

• Other business owners 
• The local chamber of commerce
• Employment agencies or temp agencies
• Recruiters and headhunters
• Business and trade associations

3.Ensure compliance with labor laws – Legal parameters are another vital aspect to consider when choosing how much to pay your employees. Talk to your legal advisor about specific minimum wage and overtime pay standards to make you compliant with legal obligations.

It is important to consider that the market rates are often much higher than the minimum wage pay rates. By paying minimum wage rates, you cannot expect to attract top-performing talent in the industry. 

4.Determine your organization’s compensation philosophy – Take a moment to think about what approach you would want to adopt towards your compensation decisions. Your compensation philosophy underlines all your pay policies and practices. You may choose to lead, lag or match the market when compensating employees. 

• Leading the market means that you pay more for jobs than your competitors. 
• Lag the market means that you pay less than market rates. 
• Matching the market means you pay roughly the same as your competitors. 

5. Be clear about your budget – Salaries are the biggest operating expense for most businesses. Evaluate your business’s ability to pay the employees. Generally speaking, to hire good talent, it is normal for businesses to spend anywhere between 40 to 70% of their gross revenue on workers’ compensation, including salaries and benefits.

If your profit margin is small, it is advisable to start low and increase in the future. When creating a budget for paying employee salaries, take into consideration the taxes, benefits, overtime, paid time off, and any reimbursements you might have to pay to employees. 

6. Consider fringe benefits – This is really important because if you don’t, you might end up paying more than what you’d budgeted for. Sometimes fringe benefits add up to nearly 25-30% of an employee’s salary.

Take into account the costs of providing health insurance, life insurance, retirement plans, leave benefits, group health plans, or any other benefit you offer to your employees. 

7. Decide how you’ll pay – Is it a fixed salary or hourly pay? Usually, it depends on the type of position and labor laws. Traditionally, managers and white-collar workers are paid fixed salaries, and temps, consultants, and blue-collar workers are paid on an hourly basis. Hourly pay is when the work is related to time spent at work. For instance, retail clerks, assembly line workers, housekeeping staff, administrative assistants, and servers are paid on an hourly basis.

Another way to pay is via commission. Suppose a position contributes directly to the business revenue, for instance, salesperson and business development manager. In that case, you may choose to pay a percentage of their salary via commission based on individual or company performance.

The jobs that don’t act directly on revenues are paid bonuses that are tied to overall project or company performance. This acts as a great motivator to encourage employees to perform better. If your business makes a profit, distribute a part of this profit as a bonus to the employees. 

8. Create salary ranges – When determining employee salaries, create salary ranges for each job position. This includes the minimum and maximum amount you are willing to pay. 

• The minimum pay range represents the lowest rate you are willing to pay for the job. It is paid when an employee barely meets the minimum hiring requirements for the position. 
• The maximum pay range represents the highest rate you are willing to pay for the job. It is paid when an employee masters all the competencies of this position, is a high performer or has a long tenure in the organization. 
• The midpoint of the pay range is the competitive market rate for the job. It is paid when an employee has a good standing with your organization and competently performs each job task associated with their role. 

Many employers develop and start new hires below the salary midpoint. This practice allows employees an opportunity to grow in their profession and within their pay range. 

9. Think total rewards – Remember, salary is only a part of the total reward package. Factor into your pay decision other attractive benefits like flexible work schedules, work-life balance, engaging career opportunities, fun at work, and meaningful work. 

Well, the question “what to pay employees?” isn’t an easy one. Be thorough with your research and analysis to attract and retain the right employees for your business. 

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