7 tips to set the right salary for your employees
Entrepreneurs rely too often on guesswork when deciding what to pay their employees. That can spell expensive trouble, especially because compensation makes up a huge percentage of a company’s overhead. You also run the risk of significant wage inequities among employees and suffering the consequences of the resulting dissatisfaction.
“There is often a lot of room for improvement,” says BDC Advisory Services Consultant Laura Matlashewski, who specializes in human resources management. “Once people understand they are paid fairly, money is no longer an issue.”
On the other hand, it should go without saying: If your employees believe they are being underpaid, sooner or later, they will walk away from your company.
Here are seven tips on how to determine a fair wage for a fair day’s work.
1. Define your compensation strategy
Start by determining how you want to position your organization in the market.
Conduct research on how your competitors compensate their employees and decide where you want to stand. Do you aim to be a market leader offering top-tier compensation, or do you prefer a more balanced approach that aligns with industry standards?
You will also have to identify the sources of your candidate pool. For example, are you targeting local talent, or are you looking to attract candidates from a broader geographic area? Understanding your candidate pool will help you tailor your compensation strategy to meet their expectations and needs.
By analyzing these factors, you can develop a competitive pay structure that attracts and retains top talent while aligning with your overall business goals.
2. Create good job descriptions
To attract the right candidates, it’s essential to create detailed job descriptions. Salaries should reflect the level of skills, experience, qualifications and responsibilities for each position. If you don’t have a clear idea of what an employee is supposed to be doing, you will have a hard time determining a fair wage.
Be realistic in your expectations: If you need someone with three years of experience, don’t ask for ten and expect to pay entry-level wages.
3. Benchmark
Determining a fair salary isn’t an easy task. You need to look at such factors as job requirements, pay standards in your industry, the size of your company and your geographic location. Benchmark against other companies using these criteria.
“You need to compare apples to apples to come up with the right formula. For the same job in Montreal and in Kuujjuaq, there may need to be two totally different pay scales,” Matlashewski says.
Other business owners are a good source of advice. Professional salary surveys can also be useful.
4. Establish a salary framework
To create effective salary practices, start by establishing clear guidelines for hiring, promoting, and recognizing hot skills. One mistake entrepreneurs make when hiring is reacting to what candidates ask for without having a clear idea of what their company should be paying. Pay scales and a bonus structure for all jobs make it easier to decide what to pay a new employee and establish a sense of equity. “It is honest and clear, and gives people perspective”, Matlashewski says. Include how you will integrate performance into pay, ensuring that high achievers are rewarded appropriately.
Set up an upper and a lower salary limit aligned to the market and reflecting the value of each position in an equitable manner.
Matlashewski gives the example of a sales position. If you are looking for a representative whose primary role will be to seek out new customers, you will likely pay a smaller salary and a bigger commission, she says.
But if you are looking for someone to focus on client retention and customer service, you will need to recognize that this person won’t have as much time for pursuing new clients. “The base salary should be more generous, with a reasonable incentive percentage.”
5. Consider total rewards
Matlashewski advises companies to consider the total value of all compensation when determining a fair base pay for each position. This includes incentives, benefits, flexible work and other rewards. Consider incentives that reward employees based on individual performance and the organization’s performance. Ensure you communicate the total rewards to both your current employees and new hires.
Finally, keep things in perspective. The amount you decide to pay should allow room for future increases.
6. Leverage your strengths
Another common mistake entrepreneurs make is trying to compete with large companies on salaries.
Owners of smaller businesses need to be creative to attract talent and ensure that they are finding the right kind of person for their company. You may not be able to offer a lot of cash, but you can provide more in non-monetary rewards such as the opportunity to participate in the growth of your business and gain a wealth of experience. The challenge is to find good people who are attracted to those kinds of rewards.
“You will sometimes meet great candidates who you simply can’t afford and who may not even be happy in your environment,” Matlashewski says. “If expectations are too far apart, you have to know when to walk away.”
7. Revisit often
To ensure your compensation strategy remains effective, revisit it often. Here are some elements you should regularly do:
- Check in with the external market to stay competitive and relevant.
- Engage with your employees to gauge if they perceive the total rewards offered as valuable.
- Utilize your data to make informed decisions and adjustments.
- Communicate the total reward packages to employees annually.
Next step
Get more insights on how to develop and enhance your HR processes by downloading BDC’s free guide, Hire and Retain the Best Employees.