How much to pay employees: salary, costs and benefits

Published Friday 27 March 2026

Table of contents

• Understanding legal pay requirements
• Deciding on pay is a balancing act
• Factors that influence employee pay
• How to determine what to pay your employees
• Making a competitive offer
• Common employee pay mistakes to avoid
• Simplify payroll with Xero
• FAQs on employee pay

Key takeaways

• Research market rates using salary tools, recruitment firms, and industry contacts before making an offer, so your pay reflects what similar roles actually command in your location and sector.
• Calculate total employment costs — including employer taxes, benefits, equipment, and future raises — before committing to a salary, since these extras can add 40% to 80% on top of base pay.
• Build a compensation package that combines salary with perks like flexible working, extra leave, or professional development, as up to a third of employees would choose benefits over a higher base salary.
• Avoid common pay mistakes like ignoring internal equity, skipping legal compliance checks, and failing to plan for raises — each can lead to staff resentment, legal penalties, or higher turnover costs down the line.

Understanding legal pay requirements

Getting pay right starts with knowing the legal minimums. Before making an offer, confirm you meet minimum wage laws and salary thresholds for your location.

Key legal requirements to check:

• Minimum wage: rates vary by region, so verify the current minimum for your area
• Salary thresholds: check local laws for minimum salary requirements for exempt employees
• Overtime rules: understand when employees must receive overtime pay for extra hours worked
• Payment timing: review legal requirements for pay frequency and method
• Record-keeping: maintain accurate records of hours worked, wages paid, and tax withholdings

Consult your accountant or legal advisor to confirm you meet all obligations.

Deciding on pay is a balancing act

Employee pay is a balancing act between attracting talent and protecting your cash flow. A competitive salary shows you value your team and helps reduce turnover. But overpaying can strain your budget.

To find the right number, weigh up these four factors:

• Candidate expectations: what salary and benefits they're looking for
• Market value: what similar roles pay in your industry and location
• Business value: how much revenue or time savings the role generates
• Affordability: what your business can realistically spend

Before committing to a full-time hire, consider whether part-time or contract support could meet your needs. These options reduce your commitment and appeal to candidates seeking flexibility.

If you decide a full-time employee is the right choice, follow these steps to set the right pay.

Factors that influence employee pay

Several elements determine the right salary for a role. Consider these factors when setting pay:

• Industry standards: different sectors have varying pay scales for similar roles
• Location: salaries often reflect the local cost of living and regional demand
• Experience level: candidates with more experience or specialised skills command higher pay
• Business budget: your cash flow dictates what you can realistically afford
• Role responsibilities: jobs with greater impact or complexity typically require higher compensation

How to determine what to pay your employees

Working out the right pay takes a few deliberate steps. Here's how to approach it.

1. Write an accurate job description

A clear job description makes salary research easier. When you define the role accurately, you can compare it to similar positions and find relevant market data.

Include these elements in your job description:

• Title: choose a title that reflects the role but is generic enough to benchmark against similar jobs
• Duties: list responsibilities and estimate the percentage of time spent on each task
• Skills: specify the qualifications and experience required
• Relationships: note who the role reports to and collaborates with

Get started with our free job description template.

2. Decide between salary and hourly pay

Before you set a number, decide on the pay structure that suits the role. The right choice depends on how the work is done and how hours are tracked.

• Salary: suits roles with consistent hours and defined responsibilities, and simplifies payroll administration
• Hourly pay: works well for roles with variable hours or where overtime tracking is required
• Commission or mixed pay: common in sales roles where earnings are tied to performance

Check your local employment laws to confirm which pay structures apply to the role you're filling.

3. Research market rates

Market rate research shows what other businesses pay for similar roles. Salary expectations shift as demand for certain skills grows, so use current data when setting pay.

Here's where to find reliable salary information:

• Online salary tools: search sites like PayScale to find market rates by job title and location
• Local business owners: ask other employers in your area what they pay for comparable roles
• Recruitment firms: recruiters track salary trends and can share insights on competitive offers
• Industry contacts: speak with professionals in similar roles to understand their pay expectations

4. Find out a candidate's pay expectations

Understanding candidate expectations helps you make a realistic offer. Use the interview process to gauge what they're looking for and whether it fits your budget.

Ask about these areas:

• Current compensation: are they paid a salary, hourly wage, or commission structure?
• Benefits and perks: do they receive flexible working, extra leave, or other non-salary benefits?
• Motivation for applying: are they seeking higher pay, a senior role, or alignment with your company values?

These answers reveal whether your offer will meet their expectations or fall short.

5. Calculate total employment costs

Total employment costs include salary plus taxes, benefits, and overhead. Most businesses spend 40% to 80% of gross revenue on employee compensation, depending on industry and growth stage.

Consider these factors when calculating what you can afford:

• Revenue impact: estimate how much revenue or cost savings the role will generate
• Time savings: calculate the value of tasks you'll delegate to focus on growth
• Employer taxes: budget for payroll taxes, unemployment insurance, and other statutory contributions
• Benefits costs: include health insurance, retirement contributions, and paid leave
• Equipment and workspace: factor in computers, software, and office space
• Internal equity: consider how the offer affects pay expectations for existing staff
• Future raises: plan for salary increases in year two and beyond, including a raise when the time comes

Set aside funds for business reinvestment before finalising your compensation budget.

6. Structure your compensation package

A compensation package combines salary with benefits, bonuses, and perks. The right mix helps you attract talent even if you can't offer the highest base pay.

Consider these compensation options:

• Straight salary: simple to administer but may limit your appeal if competitors offer more
• Salary plus bonuses: tie bonuses to performance targets to motivate results and manage costs
• Equity or profit-sharing: offer shares or profit participation to attract candidates motivated by long-term growth
• Flexible working: remote work, flexible hours, or compressed weeks appeal to candidates who value work-life balance
• Additional leave: extra holiday days or study leave can differentiate your offer
• Professional development: training budgets or conference attendance show investment in their career

Up to a third of employees say they'd choose perks over a pay rise. A thoughtful package can be more attractive than salary alone.

Making a competitive offer

Prepare for negotiation before making your offer. Senior candidates and those with in-demand skills often expect to negotiate.

Use these tactics to negotiate effectively:

• Know your ceiling: set a maximum salary before the conversation starts
• Lead with total compensation: highlight benefits, flexibility, and growth opportunities alongside base pay
• Ask what matters most: some candidates prioritise flexibility or title over salary
• Stay confident: a well-researched offer shows you understand the market
• Get it in writing: confirm the final package in a formal offer letter

When you underpay, turnover and hiring costs increase. Replacing an employee can be expensive when you factor in recruiting, training, and lost productivity.

A reputation for low pay also makes it harder to hire in the future. Word spreads quickly, especially in tight-knit industries, and top candidates will look elsewhere.

Consult your accountant or legal advisor to ensure your offer meets all legal requirements.

Common employee pay mistakes to avoid

Pay mistakes can cost you talent and money, and create legal headaches. Avoid these common errors when setting employee compensation.

• Paying below market rate: Underpaying leads to higher turnover and difficulty attracting qualified candidates.
• Ignoring total employment costs: Forgetting taxes and benefits can blow your budget after you've made an offer.
• Skipping legal compliance checks: Missing minimum wage or overtime rules exposes you to penalties.
• Creating pay compression: Offering new hires salaries close to existing employees can cause resentment.
• Failing to plan for raises: Starting salaries that leave no room for growth frustrate employees over time.
• Not documenting pay decisions: Lack of records makes it harder to defend pay practices if questions arise.

Review your compensation approach regularly to catch and correct these issues early.

Simplify payroll with Xero

Setting the right pay takes research and planning, but managing it week to week doesn't have to be hard. By understanding market rates, calculating your true costs, and staying on top of pay regulations, you can make confident hiring decisions that work for both your team and your business.

Once you've set the right pay structure, Xero payroll software calculates taxes, processes payments, and keeps you compliant. Focus on running your business instead of wrestling with spreadsheets. Get one month free and see how easy payroll can be.

FAQs on employee pay

Here are answers to common questions about setting and managing employee pay.

What is the minimum you can pay a salary employee?

Minimum salary requirements depend on your local labour laws. Most regions set a minimum weekly or annual salary for exempt employees, below which overtime rules apply. Check your regional employment authority for the current threshold in your area.

How much of my revenue should go to employee salaries?

Most businesses spend 40% to 80% of gross revenue on employee compensation, including salaries and benefits. The percentage varies by industry, with service businesses typically at the higher end of that range. See the section on calculating total employment costs for more detail.

Should I pay employees salary or hourly?

Pay a salary for roles with consistent hours and defined responsibilities. Pay hourly when hours vary week to week or when you need to track overtime. Check your local employment laws to confirm which structure applies.

What is included in total employment costs beyond salary?

Total employment costs include employer taxes, superannuation or pension contributions, benefits, equipment, onboarding, and ongoing training. Budget for these additional costs before you decide to hire, as they can add significantly to the base salary you offer.

How do I find accurate salary data for my location and industry?

Start with online salary tools for a baseline, then supplement that with insights from local recruitment firms, industry contacts, and business owners who've hired for similar roles. Official labour market data from your regional statistics or employment authority is also a reliable source for current wage benchmarks.