September 21st, 2021

3 Steps to Determine Employee Pay

Small businesses face many challenges like taxes, new laws and regulations, and hiring good employees. One essential factor in being able to hire right, and grow your business, is determining the right pay for your employees. But determining pay can be challenging for small businesses without all the resources of larger organizations.

Here are the reasons getting the right pay is critical — and more importantly how small businesses can go about determining their employees’ pay. 

Determining Employee Pay Is Critical to Get Right

What you pay your employees is very impactful to your organization. Not getting wages right can leave employees feeling undervalued and unappreciated. Ultimately, poor pay leads to turnover and an inability to grow your business. On the other hand, compensating your employees fairly and competitively attracts and retains talented employees — and makes it easier to manage your business’s financial success.

The focus on wages is also increasing among employees. More people are becoming aware of wage gaps driven by pay inequality. Data for this year shows the median salary for men is roughly 18% higher than the median salary for women, and women earn 82 cents for every dollar earned by men. This disparity can be even larger for people of color or minorities. 

Paying your employees the right amount has never been more difficult. New or specialized jobs pose particular challenges, but every job can be hard to put a number on. This is because many factors can influence salary or hourly pay rates. However, businesses still need to pay their employees the appropriate amount. And businesses who want to grow their business can use a compensation strategy to give them a competitive advantage. 

Determining Accurate Employee Pay Can Be an Obligation 

In Colorado, the Equal Pay for Equal Work Act has created legal obligations regarding employee pay. Employers are now required to provide specific pay detail in job descriptions, including: 

  • The hourly or salary pay — either an exact amount or a range — offered for the position, including bonuses or other compensation components tied to the job.
  • A high-level overview of the company’s benefits, including healthcare, retirement, and paid time off. 

The minimum wage is also increasing. Colorado’s minimum wage currently stands at $12 per hour. But the Colorado Department of Labor and Employment has proposed increasing the 2021 minimum wage in Colorado to $12.32 per hour, and for tipped employees, $9.30 per hour. Any increase can significantly impact small businesses. Employers who offer more than the minimum wage — or higher pay in general — are usually more competitive at attracting talent. But that doesn’t mean you can afford to do so. Increased labor costs are often offset in other ways (i.e. raised prices, reduced number of employees or hours, etc.) and higher wages don’t always lead to better performance from employees. 

Instead, a more logical approach based on your goals, data, and unique factors can determine the right pay for your employees. 

3 Steps to Determine Employee Pay

1. Align your compensation strategy with your business goals 

Most company’s compensation goal is whether they want to meet or exceed their competitor’s pay. But a compensation strategy should be more than this. Your HR representative and finance personnel should meet regularly to discuss pay in the context of your organization’s goals. Ideally, a strategic HR approach using workforce planning is a part of your compensation strategy. 

And if you don’t already have one, consider creating a compensation philosophy. According to SHRM, a compensation philosophy is “is simply a formal statement documenting the company’s position about employee compensation. It explains the “why” behind employee pay and creates a framework for consistency. Employers use their compensation philosophy to attract, retain, and motivate employees.” 

However, as a small business, it might be that you are in charge of both HR and finances. In this case, look to an HR partner who can assist you with your HR needs and has access to resources and expertise that free you up to spend more time on your business growth — and less time worrying about how to pay your employees. 

2. Leverage market data 

Companies big and small can use online resources to determine their employees’ pay. Market data can be used as a benchmark for comparisons or insight into how to price a particular job’s compensation. Before using market data to price pay, make sure it is: 

  • Form a credible source
  • Is up to date
  • Includes a few of your competitors 
  • Is a robust data set
  • Is geographically specific 

Some sources of pay data include Payscale, the US Bureau of Labor Statistics, or you can even use Glassdoor, Indeed, and LinkedIn for average salary ranges. The job description is extremely important to get right if you use it when looking up market data. Make sure job descriptions and job titles are relevant, up to date, and accurate before using them for your research. 

But don’t rely solely on market data. Ask employees during the job application or interview process what their salary expectations are. This will help understand if you’re in the right range or attracting the right candidates.

You can also network with other business owners to learn what pay they’re providing, what tools they use, and how they’ve learned to determine pay. And often you’re chamber of commerce or industry associations will have support in this area too. 

3. Consider your unique factors 

Your goals and market data will narrow the range of pay, but other unique factors will need to be considered. The candidate’s experience, education, and performance are valuable measures for whether you can afford to pay someone more. 

The industry and location your business is in are also important to determining pay. Some industries will have an easier time finding and hiring talent — while others will face more competition. Regardless of what the average pay range may be, supply and demand will determine whether you can pay more or less for talent. The average salary for the same job can vary depending on location too — primarily due to the standard of living and inflation rates in different cities. And with more remote workers, a location-based pay strategy might be necessary.

A Final Note On Determining Employee Pay

While salary or hourly pay is important to job seekers, it’s not all that they’re considering when accepting a job. Your benefits, leadership, flexibility, etc. all play a part. Highlighting total compensation and perks in job offers shows employees all that you provide beyond pay. 

Total compensation is an employee’s total earnings including salary, benefits, and other perks. You can share total compensation with employees in an annual document that details the total amount an employee gets for their services — both directly and indirectly. 

Providing a representation of total earnings in this way is more impactful for employees and is a more realistic representation of all that you can offer them. It’s also a helpful tool in benchmarking compensation against your competition. And if you can’t beat the market rate on pay, bonuses, benefits, and perks can add to your offering — in a more cost-effective way. 

To learn more about how you can attract top talent outside of compensation, download our eGuide below!

Download Our eGuide: How to Attract Top Talent

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