5 Steps to Determine an Employee’s Salary

How do you determine the right Employee Salary: 5 Steps for Determining an Employee’s Salary

by Joanna L. Krotz
used with permission from the Microsoft Small Business website

Putting a price tag on a staff job can be a lot harder than pricing your company’s products and services.

Pay packages have so few rules. They go up and down depending on geography, industry conventions, seniority and the job market, as well as a candidate’s background. The salary you set must be high enough to attract top applicants but not so high that it eats into your profits or survival.

Then, too, salaries are a bet over time. You invest today in the training, loyalty and productivity you hope to gain from the employee tomorrow. All in all, it can be a risky business.

How do you figure how much a job is worth? Here’s a five-step guide to benchmarking salaries and figuring out how to determine employee salary.

Guide to determining employee’s salary

1. Review your own pay practices.
Don’t wait until you find a candidate to come up with an offer. Do some homework beforehand. “The biggest mistake business owners make is to react to what an individual wants before they know what they should be paying,” says Bob Holden, vice president at Employco, a Chicago professional-employer organization that manages HR services for small businesses. Instead, get a handle on your past practices and precedents. Assuming you don’t run afoul of employment or anti-discrimination law, the decision about salary comes down to assessing how you value the job and what your company can afford. You also need to keep the salary of new hires in line with what you pay current staffers. “Go through a budget process,” Holden suggests. Check how much you spent on payroll for the past year or two. Decide how the position you’re filling fits into that overall percentage. You want to balance company payroll against the marketplace.

2. Define the job – as clearly and completely as possible.
You can’t research a job’s going rate unless you compare apples to apples. That is, you need a clear-cut job description. The job title isn’t enough. Let’s say, you decide to hire a marketing director. Salaries for jobs with that title can run from $50,000 to $500,000 or more. So the title alone is a nonstarter.” The worst thing you can do is compare job titles because they can be totally out of whack with salaries,” says Elena Bottos, compensation consultant at Salary.com, an online research and services company based in Needham, Mass. Write a job description and then use that as your point of comparison for the marketplace. Sure, staffers at every small business do a dozen different things, but there are always key responsibilities. “Match the job to others by comparing the core functions,” Bottos says.

3. Track the competition.
Uncovering the competitive rate for a job takes detective work. To find what competitors or similar-size companies are paying for the job you have in mind, a good place to start is PayScale.

4. Set the salary range.
Once you have an idea of the competitive rate, experts suggest you set parameters for the job – both a floor and a ceiling. That will keep you focused. But everyone differs about the best time to mention the salary range to the candidate. Some recommend asking a candidate how much he or she earned at the last job as a way to begin. Others suggest mentioning the salary range as a screening device, during the first interview or even phone conversations. Still others think salary should be the last thing mentioned because you’re better off getting to know the candidate’s qualifications and skills first. With a good fit, money might not matter so much. Bottom line? It depends on what feels right for you.

5. Bundle pay and perks.
Jobs are rarely only about money, although that may be what applicants mention first. These days, benefits and “quality of life” perks go a long way toward attracting talent and enriching compensation offers. With employee contributions to health-care insurance rising and employer funding for retirement and deferred-tax savings plans shrinking, it’s less expensive to outbid competitors. Don’t overlook flextime and other such options. Employees with two-career families, young children, and long commutes often choose more time over more money.

Budget for the future

However you structure the salary, don’t forget to think ahead. “You need to remember to leave room for raises and think about six months or a year down the road,” says Jane Wesman, a New York publicist and author of Dive Right In – The Sharks Won’t Bite, a guide for women entrepreneurs. If your candidate is hired at the top of your pay scale, you’ll have nowhere to go but off the charts.

When you’re ready, put the offer in writing in an offer letter. Describe all the details and terms, including start date, pay package, benefits, vacations, and so on. You might also include the special perks, like telecommuting or flextime. That way, you avoid confusion or disagreements later on.

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