How to Determine the Right Employee Compensation

There are several strategies on how to determine the right employee compensation structure and packages for small and mid-size businesses.

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how to determine the right compensation for employees

Note: This story was last updated April 21, 2021

There are several strategies on how to determine the right employee compensation structure and packages for small and mid-size businesses. How much should you offer? What’s fair? Here’s the breakdown.

New hires

In a small to medium-sized business, new hire compensation is usually determined on a case-by-case basis. Start by taking a look at the position, experience, skills, and knowledge required to fill the role.

Before recruiting and identifying candidates take a look at these factors to help identify the right person and understand a compensation range based on similar qualifications.

Market data

Once you’ve evaluated your position, you can start reviewing market data. There are many different paid sources that will give you excellent comprehensive data. Employers can also utilize free tools, such as salary comparison websites and company reviews. Many free salary comparison websites offer job listings and allow employees to self-report salaries and ratings for their employers, such as Indeed and Glassdoor.

Utilize market data to determine how much you will need to pay a prospective employee based on experience level, geographic location, industry, and job function.

Compensation history

A common and increasingly frowned upon strategy for determining compensation is asking the individual what their salary was at their last position and then adding a little bit onto that number. This strategy can be problematic because their recent salary may not have been appropriate for that specific role.

Furthermore, this strategy is actually illegal in specific regions such as New Orleans and New York City as well as in states such as California, Massachusetts, Delaware, and more.

Compensation strategy

Once hiring decisions have been made it’s important to develop a compensation strategy to keep employees satisfied long term. Build the right employee compensation structure that gets new hires in the door, rewards their value to the organization, and motivates them to grow within the company.

Bamboo HR and PayScale share questions to ask yourself when developing a compensation strategy:

  • How does pay align to our business goals?
  • What do we value and how do we want to reward those values?
  • What pay choices will help us retain, motivate, develop, and attract top talent?
  • How/do we want to prioritize pay for the jobs that are mission critical?

Equal pay for equal work

To establish an equal pay strategy be proactive in adjusting employee pay for a fair workplace. This can mean giving an immediate pay bump or an increase over the long term. Decisions should be made according to your comfort level and what’s fair and right for the employees.

The best way to ensure your company is paying employees fairly is to conduct a pay equity audit. A compensation audit will look at the effectiveness and competitiveness of salaries, bonuses, incentives, and equity programs.

HR teams should audit compensation regularly. There are many changes that could affect salaries and it’s important to adjust employee pay when needed. Make sure to monitor the market and economic changes on a regular basis.

Looking for more compensation information? Here are our compensation FAQs answered by payroll experts.

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