Every small business owner asks himself/herself, “How much should I pay employees?” The right employee pay is truly one of the most critical issues for a business owner to solve.
Is Employee Pay Really Important?
Employee pay is not simply a budget number. It is a critical measure that reflects how each employee feels he/she is valued by the employer. And how valued employees feel directly translates to how engaged they are and how well they perform. A study by the Society for Human Resource Management (SHRM) indicated that 63 percent of employees said compensation and benefits was an important factor in joining a company. So, the actions to pay employees well directly impact hiring levels and job satisfaction.
How to Decide How Much to Pay Employees
Deciding what to pay employees is somewhat of a balancing act. It involves deciding what compensation is affordable for the company, balanced by the factors of what employees expect to be paid, what they are worth in the marketplace, and what they are worth to your company.
Follow this suggested process to determine how much to pay employees:
First, determine a budget for total employee salaries and benefits. It will be a big number and likely the largest company expense line item. By budgeting funds, you’ll have enough money to pay your employees and cover the cost of raises and new hires. Your budget should also include overtime, paid time off, taxes, and benefits.
Second, write a complete job description for each type of job including the primary duties, skills required, and the level of experience needed.
Third, examine the average pay for comparable roles in your industry and focus on your own company geography. Make sure to get up-to-date salary information.
Fourth, determine pay levels, considering the ROI of each position. That can include the factors of how much it will cost to onboard an employee, how much an employee impacts other team members, how they will be paid based on performance, and how much it would cost in the future to replace the employee.
Fifth, understand and be prepared to abide by the laws regarding employees.
Sixth, make sure to clarify candidates’ pay expectations.
Seventh, make an offer and provide a clear explanation about the pay and benefits. Make sure the offer is competitive.
Don’t Just Offer Average Pay
As you think about pay, think about how valuable (and essential) your employees are. Here’s why you should pay above average pay (so you don’t hire average employees.)
- There’s only so much good talent available.
- Higher pay contributes to higher output.
- Higher pay translates to higher word of mouth to help future recruiting.
- Better pay means that employees won’t be so likely to leave.
- Employees will likely focus more on their work rather than grumbling about fair compensation.
- You may need fewer people to accomplish critical tasks.
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