It makes sense that employees expect to be paid what they consider is fair. It’s often a challenge as a small-business owner to determine a fair wage so your employees feel well compensated, advises Jessie Seaman, a licensed tax professional and attorney at Tax Defense Network. “Determining competitive pay requires that you develop and follow a strategy,” she says.
Check Out the Competition
Start salary determination by doing comparisons of similar jobs in your geographic area, advises Tom Panaggio, author of The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge and co-founder of two direct marketing companies.
“It doesn’t have to be a scientific study or involve a great deal of research,” he says. “Survey temporary services, employment agencies and want ads to get a sense of what others in your local marketplace are paying. You can then offer lower level employees the same pay rate, and for higher level employees, use market comparisons as a starting point for salary negotiations.”
Such research is something employees may do themselves during a job search, so having your facts straight can help. Ideally, you want to avoid being asked during an interview why you’re offering less than the going rate.
Make It Incremental
The hiring and training process can be lengthy and costly for a company, with much expense on the front end and very little revenue generation from new employees, Seaman notes. “Considering the cost of hiring, it can be best to focus on retention. One effective way to keep new employees invested in your company is to start them off at the low-end of the pay scale, but give increases after 90 days, six months and nine months.”
Offering raises over time helps you determine how much an employee is worth to your company. “The incremental increases in pay during the first year will drive employees to ‘prove’ themselves and give their best effort all year long,” Seaman says. “In this environment, employees will want to show you that they are an asset to your company, and you in turn increase their wages based on their proven value.”
Reward Productivity
Panaggio advises focusing on what employees produce when determining wages rather than seniority. “Don’t give raises just because someone has worked for you a long time,” he says. “Instead, give performance raises, and pay salespeople as much money as they can possibly earn, even if it means they make more than top-line managers. I had a couple of salespeople who made more than me, the CEO. And don’t ever cut commissions because salespeople are making too much.”
While many employees tend to focus on fair pay across the board, Panaggio finds it helps to explain to employees that some positions in your company have wage ceilings, and the only way to earn more is take on more responsibility and progress within the company.
Watch Your Bottom Line
“Balancing wage levels with the financial health of your company is a delicate balancing act,” says Panaggio. “It can become a ‘chicken or the egg’ predicament. If the financial health of your company is suspect, then it may require you to pay more than market for better employees with the idea that maybe your financial problems are the result of poor execution by less than capable employees. And you have less than capable employees because you didn’t attract better ones due to your wage scale.”
Whatever you decide to pay your employees, keep in mind that you may not want to compensate them more than the job is worth to you. Salaries are business expenses, after all. They’re investments that should offer you good returns. Before offering someone employment and a salary or offering an existing employee a raise, it might pay to determine your absolute salary ceiling by analyzing the potential value that person can bring to your company.
Think Beyond Salary
The work environment often plays a big factor in employee contentment, Panaggio believes.
“Wages are certainly a component to a happy workforce, but not the only factor,” he says. “Create a positive work environment with employees who are informed by management about the state of the company, and they will be much more accommodating and accepting when wages have to be reduced during tough times. When times are good, give back to employees in the form of bonuses and incentives.”
Also remember that being a small business can be an advantage. “You will likely attract potential employees looking for something beyond the corporate structure,” Seaman says. “Offering something as simple as a special title can go a long way toward making a would-be or current staff member happy.”
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This article was originally published on May 21, 2015.
