How Do Companies Determine Salary?


According to a 2018 Forbes analysis, wages have not kept up with inflation for nearly 50 years. This isn’t due to a lack of money. It’s due, instead, to poor financial management. 

If you’re a first-time employer, you’re probably feeling a bit stressed about determining the salary for your employees. 

Ultimately, the goal is to set salaries that are fair and competitive without offering more than you can afford to pay. If you don’t have a clear, designated plan for compensation, it’s not time to start hiring yet.

Read on to answer the question, “How do companies determine salary?”

Begin with Job Descriptions and Rankings

Before you begin to set salaries, you need to take a long look at the positions you’re hoping to fill. Go beyond job titles and start listing out the skills and responsibilities associated with each position. 

Once you have a clear sense of the roles each employee will play in your company, you need to rank them. Who has the most responsibilities? Which position requires the least experience from the start? 

Group your positions based on factors like responsibility level, skill level, and necessary work hours. This will give you an indication of who should receive the most compensation and who can afford to pay less.

How Do Companies Determine Salary In Your Sector? Look to Salary Surveys

Salary surveys are a tool that most employers rely on. The idea is that you can look to other companies performing similar work and offering comparable positions to the company you are running. These surveys give you an idea of the market rates that are being offered by other companies in your sector.

In order to make the most of a salary survey, you need to get specific. Not only do you need to look at surveys of your specific industry but you want to find surveys that come from your region. The cost of living fluctuates depending on where you live and the salaries you offer must reflect those differences.

Consider Your Company’s Position in the Job Market

Now that you have a basic understanding of the average salaries offered to employees in your sector, it’s time to take an objective look at your own company. How competitive are you within your field? How do you compare to similar businesses in relation to size and business income?

There are a few reasons to offer more money than average and only one to offer less.

The first reason to offer more money is that you’re concerned about low employee retention.

Hiring is an expensive process and constant turnover will slow the progress of your company.

The second is that you want to hire the best of the best. Nothing turns away a top tier candidate like a long list of necessary qualifications and a below-average salary. If you only want employees with master’s degrees and ten or more years of experience, you’re going to have to pay up.

The only excuse to offer less money than the market rate is if you simply can’t afford to pay more. If this is the case, remember that you’re asking your employees to gamble on your ability to grow the company and offer more money in the future. When the time comes, those salaries need to increase. 

Create Your Salary Structure

There are two primary ways that employers tend to create their salary structure. You might use the salary range model or the pay grade model.

The salary range model entails that each position has a set minimum and maximum pay rate. Typically, candidates are given the opportunity to negotiate their salary within that range and there is a cap on raises. 

The pay grade model entails that you’ve ranked your positions and offer the same amount for every position that falls within the same ranking. Most employers that offer a pay grade do not allow employees to negotiate for their pay. Instead, the goal for employees is to receive promotions that will come with a larger salary. 

Remember that these numbers do not have to be inflexible. In fact, they shouldn’t be. If you find that your company is in a position to offer more pay to all of your employees, start raising those salaries. 

No matter the salary structure you use, your compensation needs to be accessible and transparent to your employees. Use a payroll check template to ensure that your employees see exactly what’s happening with their money. Everything from benefits to federal taxes should be included on your paystubs, thus avoiding confusion or frustration. 

Examine Internal Inequities 

Have you already started the hiring process? Do your employees receive salaries you haven’t examined for quite some time?

Take time each year to go over every salary you offer. Examine these salaries in relation not only to the positions being filled but the employees filling them. What experience did they come in with and how are they performing?

If you start to notice discrepancies within each ranking or pay grade, figure out what is causing these discrepancies. Are they falling along lines of sex, race, religion, nationality, age, or sexuality? Brush up on your knowledge of protected classes in federal and state law.

In setting salaries, you can contribute to economic equity not just within your company but within the wider community. It’s not enough to offer competitive salaries compared to other companies in your region and industry. You also need to make sure that the way you’re setting individual salaries is both fair and equitable. 

Pay Your Staff What They Deserve

How do companies determine salary? There’s more to it than looking over your income and liquid assets. The goal is to ensure that you’re offering as much as you can without going under and ensuring fair pay in the process.

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