How to Set Employee Compensation

There are a number of ways to set the compensation for your employees. And when you’re starting a business, or in the process of hiring your first team, how to pay them is an important decision you will have to make. Because a lot of times, whether we like to admit it or not, how we are compensated for something affects how well we do it.

Last week we looked at two competing viewpoints. We made the case for paying employees more, and the case for paying them less.

But today, I wanted to offer a middle-ground solution that new managers can use to set appropriate levels of compensation. Here are some things you should be prepared to do before you start:

  • Look at job postings for competitive positions at other companies to get a sense of what the going rate is in your area
  • Ask people what they are expecting during the interview process
  • Identify areas of each job that can be compensated based on some performance metric
  • See the big picture and don’t get cheap (that does not mean I think you should be reckless either)

Now, for each position for which you need to set compensation, it will ultimately depend on who you employ. I don’t believe in setting a standard salary for each position and anyone with that title makes the same amount. If you hire someone that can do the job better than others, they should be paid more.

That is where performance based compensation can come into play. And I encourage you to structure compensation plans with some performance based bonus included, because it is an incentive that will attract the truly talented people to your company and will weed out those hires that just want a job.

And so, you have a general salary range that you know is the going rate for each position. And you have another range that your candidates and hires are looking for. Compare the two, and if they seem to match up, you are in a good place. Then apply some level of performance to the mix, which will allow you to lower the overall base salary but still attract talent in the group of candidates. And always err on the side of more, rather than less.

That is a perfect strategy for setting compensation for new hires, and one that I personally have used and seen in use in a number of successful small businesses.

Any questions?