How much should I pay my employees?
Small Business Guides
7 min read
You’ve got the right person lined up – good skills, great attitude and experience that hits the mark. You want to hire them. All you need to decide now is: how much should I pay my employee? The answer depends on a lot of factors.
Deciding on pay is a balancing act
It’s a fact that a good salary attracts and keeps good talent. It shows you value your employees and boosts their self-worth. Yet, as a business owner, you don’t want to overspend on pay.
So what’s the right number? Working it out is a balancing act. You have to weigh up:
- what a prospective employee wants
- what they’re worth on the market
- what they’re worth to your business
- what you can afford to pay
During this exercise, you should also ask if you can cover the role with part-time or contract support. It’s less of a commitment for your business and there are often candidates looking for that sort of flexibility.
But if you decide you need a full-time employee, here are some pointers on figuring out how much to pay them.
Work out what to pay your employees in six steps
- Write an accurate job description
An accurate job description will make it easier to set the salary. Start with the title. Make sure it accurately reflects the nature of the job and the duties you want your employee to perform. But make it generic enough so it can be compared to a similar job in a similar industry.
List the duties and responsibilities you want your employee to fulfil. Show what percentage of time you expect them to spend on each task. Once you’ve summed up the skills and work relationships that are relevant to the role, you’ll have what you need for step two – gathering market data.
- Get up-to-date salary data
Find out what other businesses are paying for the role you want to fill. But be aware that data on how much to pay employees changes constantly. The demand for certain skills can grow quickly, leading to increased salary expectations. Get information that’s current and fresh.
There are several good places to go looking.
- Start online
Search websites like PayScale to find out the market rates for different jobs in your location. It’ll give you a good snapshot for free, or you can pay for a detailed report.
- Talk to locals
The web is a good starting point for general data, but there’s no substitute for talking to people. Get in touch with other business owners and recruitment firms. Your suppliers and customers are also good sources of information. Anyone who’s had to ask themselves “how much should I pay my employees” will have valuable advice.
It also helps to speak with people whose job description matches the vacancy you have. If you’re hiring a senior designer, for example, chat with senior designers in your network.
- Comply with the law
If you plan to employ someone on the minimum wage or offer overtime, you’ll need to check the law to make sure you’re compliant. There’ll be other legal issues you need to understand so talk to your advisor and check out the IRS guide to understanding employment taxes.
Use this checklist to guide you. Check out:
- minimum wage obligations
- legal requirements around the day, frequency, and method of payment
- what you’ll have to do if you want to change the day or frequency of payment
- when to pay annual vacation days
- your record-keeping obligations
- Start online
- Find out a candidate’s pay expectations
When asking “how much should I pay my employees”, don’t forget that your candidates probably have an opinion. Use the interview process to get a sense of their expectations and decide early if you can afford them.
- current pay – are they paid a fixed salary, commission or wages?
- additional benefits – what’s their current situation? For example, do they receive insurance, additional vacation days, the opportunity to work from home or the flexibility to leave early to meet childcare commitments?
- reasons for applying – what are they looking for? Is it to find a more senior role and increase their salary? Are they looking for a partnership opportunity? Was it your company’s brand or values that attracted them?
Answers to these questions will give you valuable insight into your candidate’s pay expectations and help you make a realistic offer.
- Calculate what you can afford
You’ve gathered data from the market. You’ve checked the law and sounded out your candidate. Now it’s time to look inside your business and ask not just “what should I pay my employees?” but “what can I afford?” Grab a calculator and run through the following questions.
- How much revenue is your new employee likely to help generate in a year? What’s the return on your investment?
- How much time will they save you – that has a value too. You’ll have more opportunity to grow the business.
- Where does the role sit in your organization’s hierarchy? Could the offer you make affect the expectations of other employees?
- In a year or two – when it’s time for a raise – will you be prepared for that?
- Remember to work out how much money you want to put back into the business every year. Make sure you don’t eat into that money when deciding how much to spend on employee salary, taxes and benefits.
Talk to your lawyer to make sure your offer stacks up (and isn’t breaking any laws). And be prepared to negotiate when the time comes – particularly with senior employees.
- Make an offer
Once you’ve decided how much to pay your employee, you need to ask what else will go into the offer, if anything. Here are some options.Offer a straight salary
A straight salary is the simplest and easiest offer to make, but candidates are used to getting a whole package so this could limit your appeal.Put forward a mix of stock, salary and bonuses
Offering a mix of stock, salary and bonuses (tied to specific performance targets) is another option for the right candidate. A package featuring stock and performance bonuses can be more affordable. And it can make a big difference to people who are motivated by goal-setting and rewards.Provide flexibility in the workplace
Up to a third of employees say they’d choose certain perks over a pay rise – so money’s not everything. Some people place a big value on working part-time, having an extra week’s vacation or getting time off to study or look after family.Be competitive
Whatever you offer, make sure it’s competitive. It’ll show you’re serious about making the new hire a part of your team.
Remember that staff turnover can grow when employees think they’re underpaid. You’re better off spending a little more and keeping your staff than constantly hiring and training new people. Besides, word gets out – you’ll have trouble attracting new people if you have a reputation for low pay.
- Keep good records
You’ll need to keep employee records for three years. Speak to your lawyer or consult the government website to find out precisely what information you should have on file.
Use this checklist as a rough guide.
For each employee, record:
- name, address, phone number and social security details
- a copy of the offer letter
- start date with the company
- pay rate and pay period (weekly or monthly)
- if paid hourly or by salary
- any payroll deductions
- W-4 withholding allowances
- any benefits
- annual vacation balance
On their first day, you should:
- file a signed federal W-4 tax withholding form
- file a signed state tax withholding form, where necessary (find out where this applies)
- file a signed I-9 for work eligibility verification
- register your employee in your state’s new hire reporting program
And, remember, this is sensitive information so:
- keep it secure
- back it up so it’s not lost if a computer or server crashes
Put your best foot forward
“How much should I pay my employees?” isn’t an easy question to answer. Take the time to do your research, however, and the rewards can be great. You’ll get the right person at the right price. Just be prepared to put your best foot forward when you make your offer. It’ll go a long way toward attracting and retaining the right talent.