Guide to Setting Employee Pay Levels and Salaries

How to zero in on appropriate employee compensation in a small business

By John Henshell, Writer/Editor/Communications Consultant, John Henshell

Your profitability, your overall compensation package and the employee's replaceability are also considerations. To determine a salary:

1. Establish a pay structure
2. Review salary surveys
3. Make adjustments for your market and industry if necessary
4. Make adjustments based on the competitiveness of your benefits package.

Action Steps
The best contacts and resources to help you get it done

Establish a compensation plan

Decide what kind of pay structure you're going to implement: a standard pay structure (fixed salaries) or an incentive-based structure (base pay plus incentives or bonuses). Incentive-based pay is commonly used for sales positions but is becoming more popular with other positions as well.

I recommend: Get a good grasp of fixed and incentive-based pay structures at HowStuffWorks.com. Links to compensation resources are available from the Free Management Library, and the National Federation of Independent Business (NFIB) and the Microsoft Small Business Center offer additional tips for setting employee salaries.

Tap online help for setting salaries

Online salary sites offer tremendous help when deciding on what to pay for a specific type of job in your industry or location.

I recommend: See the small business section at Salary.com. JobStar has annotated links to more than 300 online profession-specific salary surveys. SalaryExpert.com offers a free salary calculator and links to dozens of salary surveys reports and cost-of-living data. The Riley Guide's salary guides & guidance page has comprehensive links to salary guides and sites that explain how to evaluate them.

Comply with wage and overtime laws

The federal government and individual states have laws regarding minimum wage and overtime pay. Minimum wage laws in your state may vary for certain professions such as commission salespeople or restaurant wait staff. The government defines employees who may be 'exempt' from overtime pay.

I recommend: Check U.S. Department of Labor regulations to decide if a position should be salaried or paid hourly.

Don't forget about benefits

When establishing pay ranges, weigh the value of additional benefits, such as medical and dental coverage; life and disability insurance; and holiday, vacation and sick leave pay. Small businesses can't always offer the same level of benefits as large corporations, but you can offset that by offering attractive, no-cost benefits, such as flexible hours, telecommuting and a casual dress code.

I recommend: Get a quick overview of the importance of offering benefits from the SBA and find more information about the many types of benefits at BenefitNews.com. The U.S. Department of Labor's Bureau of Labor Statistics offers benefits surveys and resources on its Web site.

Set the parameters of incentive programs

If you choose to implement an incentive-based salary, you need to establish how the program will work. What goals will employees need to reach in order to earn the incentive or bonus? Make a certain number of sales in a quarter?Reach a certain dollar amount in sales each month?

I recommend: Salary.com's CompPlanner can help you administer an incentive-based program.

Helpful advice for making the most of this Guide

• •  Small businesses typically pay lower wages than larger businesses, but they offer greater responsibility and opportunity to grow with the company.
• •  Make sure the salary and market information you review is current.
• •  Offset lower wages with benefits, such as senior-level titles, an important role and a variety of responsibilities.