How to Set Employee Compensation

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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?

The Case for Paying Your Employees Less Money

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It’s no secret that for the bottom 90% of Americans, wages have stayed basically flat for the past thirty or so years. And there is a lot of buzz these days about whether or not to raise the minimum wage. That certainly won’t solve the problem, but it’s a good start.

When you are running a company, you have to decide how you will set compensation across your organization. There are a couple of competing ideologies at play. Some say pay employees more, some say pay them less.

Here is the case for paying them less:

  1. Salaries are expensive. In any company, employee pay is going to be one of the biggest costs of doing business. And it’s easy to look at the total salary number as a percentage of revenue and think about how you can lower it.\
  2. Tie salaries to production. Keeping base salaries low and paying performance-based bonuses is not necessarily keeping wages low, but it is a way companies can attract talent without broadly raising wages.
  3. Salary waste. For each position with your company, you can look at what you’re paying vs what you’d be paying a new hire with the same qualifications. If you are paying someone more than you would pay for something new in that position, it’s easy to view the difference as waste.
  4. Profits and investor returns. The lower you can keep salaries, the higher your earnings.
  5. Job growth. If salaries are lower, you can generally afford to hire more workers. If all salaries go up, many companies worry about the need to cut staff.

Yesterday we made the case for paying them more. Check it out here.