How to Determine a Fair Salary Range for Employees

Updated on February 21, 2018
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George is an independent small business consultant and business owner with a mission to help entrepreneurs improve their management skills.

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It is essential for companies to be competitive in the salaries and wages offered to their employees. Without a fair and competitive pay structure, a company exposes itself either to hiring unsuitable candidates or losing talented people. When there is no process in place to regularly update compensation practices, you are leaving it to employees to do their own research.

Self-comparisons can be misleading because the employee may not consider the total benefits package. The compensation package should be based on a transparent process that involves the participation of the employees. Statistics on the different market values for job positions should be openly discussed. In this age of search engine references, the information is readily available to all. Hiding from the realities of the marketplace is never a good idea in the long run.

Fair and equitable pay for a prompt, timely, and accurate performance of assigned functions, tasks, and responsibilities is a major tenet of the employee/employer relationship. Each employee contributes to the success of the business, and each job has a specific value. Employees should be paid in accordance with the relative value of their job, compared with other jobs in the company and those of the competition.

Positions are designed to fulfill defined essential functions of the business. These positions also have certain responsibilities, authority and are accountable for specific results. All company functions have an economic value attached to the function. The functional organization chart and job descriptions are used to define those functions, responsibilities, duties and tasks. The position's economic value is determined through a process of weighing the basic factors that distinguish one position from another, such as education, certification, knowledge, experience, independent judgment, creativity and others, which are inherent in all job descriptions. These factors are used to establish compensation fairness and a relative value of the positions.

It is helpful to establish a salary or wage range, which defines the minimum and maximum monetary value of the position. Compensation starts with a base pay, which is the amount an individual is paid relative to their specific knowledge and skills, which have a value that is defined by the Company. Some individuals are paid on a basis of special skills, technical knowledge or certifications, but all pay is still connected to basic values of some kind. The pay range for a specific position should be tied to some form of measurement. The more efficient, productive and creative individuals deserve to reach the maximum levels in their job category. Pay ranges should be constantly reviewed, measured against the market norms and updated at least once a year. Usually, these reviews coincide with departmental budgets. Increases should be tied to the profitability of the company, skills development, technical knowledge enhancement and above-average performance.

To the basic salary and wage rate, more progressive companies offer performance-based incentives and bonuses. These should be tied to the Company's growth in revenues and profits. Everyone contributes to this growth in some fashion, and this is appropriately weighed in the incentive plan. Sales representatives should ideally be rewarded with both a base pay and a commision that reflects their contribution to maintaining and increasing the customer base.

How to Develop a Fair Base Pay For Each Job Category

This is usually assigned to the Controller or Human Resources Manager. It requires a survey of comparative salaries and wages from the geographical area in which the company operates. A spreadsheet is a useful method to identify each job category within the company. This control sheet should record the current pay scale offered by the company for each function and those of other competitors in the same industry. This information can be gathered from various online sources, which include: job service centers, chambers of commerce, university placement services, government job data and industry associations. From these sources, you can obtain the high and low pay rate for the comparable position. The average of the two sets the standard market-driven salary/wage range for each job category. It is advisable to update the survey information whenever hiring, or when an employee quits for a better paying job. It is advisable to perform an exit interview whenever an employee decides to leave because this is usually a good source of objective information on compensation competitiveness.

The Job Value Factoring System

Value factoring is dependent on such key elements as experience, education, job knowledge, independent decision making and performance. The factoring system is used to justify the minimum to maximum pay scale for the various functional positions in the company. In an age where inequality is an important social issue, justifying the differences in salary scales on a measurable basis creates more trust and is a boost to morale. Too often, the decisions on compensation are based on subjective biases that should have no place in a progressive organization. There are key factors in every position that can be evaluated on a scale of 1-5. It establishes a more transparent and fair evaluation system. The factors to consider are as follows:

Education, Certification: Decide on the minimum and maximum level of education or certification required for the position and score accordingly. (1-5)

Ongoing education and certification: Rate the employees who regularly upgrade their knowledge by taking additional courses—a very important factor in high tech(1-5)

Years of Experience: 15+ years should be scored at the top of the scale, with progressively lower marks for fewer years. (1-5)

Knowledge: Remember that experience doesn't always equate to superior knowledge. This can be gauged from observation and consensus from others. Particular attention should be paid to the acquirement of new knowledge that has contributed to the Company's advancement. (1-5)

Judgment: This can be evaluated from the quality and quantity of independent decisions attributable to the particular employee. (1-5)

Creativity: A very important factor in every position but a high priority in those functions that require out-of-the-box thinking. Most top management and design related positions fall into this category. (1-5)

Performance: To rate performance use the measurements of performance that should form a part of every job description. This is a goal and objectives-driven evaluation, which conform to the appropriate drivers for each position – sales, gross and net profits, productivity gains, financial ratios and others. (1-5)

Team Orientation: Each individual is a part of the team, which is both departmental and includes the entire company. Positive interaction, cooperation and communication affect every aspect of the Company's well-being. (1-5)

Tabulate the points total for these eight key factors. The maximum is 40, and any individual scoring in the 35-40 range deserves to be at the maximum level for their current position. The minimum should not score below 25.

New Employees

Normally, new employees are hired at the bottom or mid-point of the range. Exceptional candidates with specific expertise may be hired at a higher rate, but should not exceed the maximum. It is dangerous to set a high compensation precedence when hiring new talent in a function that already exists. One way to get around this is to add a new job description for specialized positions while ensuring that the pay scale corresponds to the norm in the industry. New employees should be evaluated after three to six months. This is an opportunity to reward exceptional talent and to weed out the misfits. Use the Factoring System to evaluate the recently hired employees.

Annual Salary and Compensation Reviews

Based on continued satisfactory evaluations and profitability of the company, salaries should be reviewed annually and be an intrinsic part of the budgeting process. This should be consistently applied. Even if budgetary restrictions do not permit increases, a performance review is necessary to let each employee know where they stand. Always try and find some budgetary space for the top performers, because they are the ones that will pull the Company out of a decline.

The employee’s base salary should not exceed the maximum established monetary value for the position, adjusted by the annual rate of inflation. Once an employee reaches the top value in the range, salary increases should then be based on promotion to a higher position. Sometimes, market conditions in new industries force an upgrade in a particular job function. This may call for an adjustment of the maximum to meet competitive realities.

At times, economic conditions may change for the worse, and the company may need to reduce the minimum and maximum amounts. While it is difficult to claw back salaries and wages, this can be partially accomplished by attrition and job consolidation, and by hiring new employees at a reduced pay scale.

Sales Personnel

Sales managers and representatives should ideally have a compensation package that consists of a base salary, and an additional commision or incentive bonus. The base salary should not be set at a level that provides too much comfort. The sales personnel must be motivated to grow their sales through an escalating commision plan. Commission rates should be set in such a way as to reward the acquisition of new customers more than just for maintaining existing ones.

A good rule is to establish a rate for new customers at twice the rate for existing ones. An extra incentive should be given for the achievement of sales levels that exceed the annual quotas or/and goals. The sales personnel need to know what the commision rate payouts will be in each case so that they can formulate their own strategies for the achievement of higher personal goals. The commision rates vary for different industries, and it is essential to obtain information on this from the same sources that are used for determining the level of salaries. Commission payouts are normally made on a monthly basis. A sales manager's compensation should be tied to the performance of the entire sales team. It should also contain a variable scale of rates that apply for different levels of sales, which meet and exceed the quarterly and annual goals.

Employee Benefits

Employees will not only look at their salaries and bonuses but also focus on the additional benefits offered by the company, such as health care, vacation, number of statutory holidays, flexible work hours, maternity/paternity leave and others. The company should always attempt to provide the best possible conditions and benefits that are competitive with what is offered in the marketplace. Health care is of particular importance to employees with families and plays a strong role in the decision to accept employment.

Incentives And Bonuses

An incentive plan, which includes employees at all levels of the organization, is a must for all progressive companies competing to attract the best talent available. These companies should formulate their compensation packages in such a way that a significant portion comes from incentives and bonuses. Incentives may take the shape of performance-based monetary compensation, company shares options or a combination of the two. Incentives and bonuses are tied to outstanding performance by the individual, department or company as a whole. Each employee contributes in some way to the success of the company dependent on their position. A Sales Manager will have relatively more impact on revenues and profits than a production worker. Their share of the incentive/bonus pool should thus be proportionate to their contribution. This can be controlled by incentive payouts that are related to their salaries or wages.

Owner's Compensation

It is sometimes difficult for an owner to decide what they should pay themselves. This depends a lot on the position of the Company's life-cycle: from that of a start-up to a mature and established Company within its industry. When starting, the owner is primarily concerned about survival and should be ready to make personal sacrifices in order for the Company to reach stability. This often entails taking a survival salary that will just make ends meet on a personal basis. This kind of sacrifice cannot be expected from hired employees and means that, in many circumstances, owners receive pay that is lower than that of their subordinates.

Once the business reaches a more mature position in the company's life-cycle, then the owner can expect to benefit to a higher degree than others. Studies show that the best course of action, in this case, is to take a salary that is commensurate to the owner's formal position in the Company, such as President, and accept a salary that matches the compensation of other presidents operating in a similar-sized company and in the same industry. Owners can always take additional compensation from dividends when the success of the Company warrants it. In most cases, it is the most economical way to withdraw money from a tax perspective. Another way is to take special perks that can be written off as costs by the Company and avoids double taxation.


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