When it comes to setting employee salaries, business owners, chief financial officers (CFOs), and HR managers can feel overwhelmed with finding the magic number. Like Goldilocks, you’re looking for something “just right.” Overpay and you might struggle to make payroll. Underpay and you’re unable to hire and retain quality employees—especially in a job seekers’ market.
How do you find that sweet spot where your team members feel appreciated, yet payroll is not devouring your organization’s budget?
First Things First
Before you go any further make sure that your position descriptions are current and accurately reflect the depth and breadth of the position. If you haven’t updated your position descriptions in a while, take the time to do it. Positions and responsibilities evolve as your business grows and staffing needs change. This is also the time to review your overall compensation strategy.
The Society for Human Resource Management recommends reviewing your overall salary structure every three to five years.
When setting your salary structure you need to decide if you want to lag, match, or lead with salaries in your market.
Gather Your Intel
Now that your descriptions are updated, you can start to compare your job descriptions with those outside of your organization to determine the market rate for each position. This process is called salary benchmarking.
Lucky for you there are tons of online resources offering salary data. While some offer free data, others charge for more detailed information. When comparing salaries, make sure that you’re comparing “apples to apples” and that the position descriptions match up.
This list isn’t an exhaustive, but it’s a good start:
- Salary.com (HR-reported data)
- Glassdoor.com Salary Calculator
- PayScale Salary Calculator
- U.S. Department of Labor Bureau of Labor Statistics
These sites will give you a general idea but you’ll need to consider what makes your market unique. These factors include how much competition you have for job seekers, the cost of living in the surrounding area, your company’s revenue, the size of your business, and the pool of job applicants available in your area. Talking to peers in your field can also be a way to gather information.
Benchmarking allows you to calculate the minimum, midpoint, and maximum salary for specific positions based on your research and then create your own ranges. Minimums and maximums generally fall within 15-20% of the midpoint.
Making the Grade
Creating pay grades is another helpful exercise in setting salaries.
- Using your (current!) position descriptions, evaluate all of your positions by the level of responsibility and contribution to your organization. Sometimes you can easily put a dollar value on a position’s contribution, for example by calculating the revenue someone on your sales team generates. For other positions the value may include the unique knowledge someone brings to the organization and the time that saves the rest of your organization.
- Group positions with similar levels of experience, value, and responsibility together into a compensation structure creating minimum, midpoint and maximum ranges for these job families. Within these groupings you may have entry-level (grade 1), mid-level (grade 2), and senior (grade 3), for example.
A grade 1 position may have a salary range of $25,000 to $35,000 from minimum to maximum, with a midpoint of $30,000. A grade 2 position (which would assume more experience) may have a midpoint of $40,000 and a range of $35,000 to $45,000.
While you don’t want to break the bank on salary, if you don’t match the market rate not only will it be hard to hire but it will be hard to retain top talent.
According to a survey of chief financial officers by HR consulting firm Robert Half, the top reason good employees quit was inadequate salary and benefits.
A related survey showed that 38% of office workers reported poor compensation as their primary reason for quitting a job.
There are all kinds of estimates as to how much it costs to replace an employee. While the numbers may vary, one thing is for sure: employee turnover is expensive.
The Total Package
Salary may be the largest piece of your compensation package, but it’s not the only piece. Benefits such as health insurance, dental insurance, retirement plans, paid vacation, and tuition assistance can also add value for your employees and set you apart from the competition. Health insurance alone can be valued at between $5,000-$30,000 depending on the number of dependents and employee contribution.
One highly sought-after benefit you can’t put a price tag on is flexibility and it can sweeten the pot for a potential hire if you can’t pay at or above market. More and more workers, especially millennials, are looking for the option to flex their hours or to work remotely some days.
In fact, if you don’t have the salary budget to match the cost of living in your market, you may want to consider whether a position can be filled remotely thus expanding your pool of applicants.
In Your Corner
We love providing our clients with tools that make their jobs easier. One of those is a salary benchmarking tool that we offer through our iSolved HCM software solution.