How to Decide How Much to Pay an Employee

by Greg DePersio

2 min read

For a new small business to succeed, it needs the right people in the right seats. To attract the best employees, you have to offer competitive salaries. For most new businesses, however, money is tight, and keeping down costs, including employee salaries, is paramount to avoid a potential financial hole. It is crucial to find the right equilibrium of paying employees enough to attract top talent, and not overspending on talent and upsetting your company’s budget. Determining how much to pay an employee requires conducting research, estimating return on investment, and negotiating effectively.

Conduct Research

Setting a proper salary range requires knowing what other companies in the area are paying for the same position. If you offer a significantly lower amount, the only applicants you’ll attract are bottom-of-the-barrel candidates that were rejected from higher-paying jobs. On the other hand, if you pay a lot more than the market commands for a particular job, you waste your money unnecessarily. The ideal place to be is right in line with other companies. Asking is the easiest way to determine this amount. Find businesses that aren’t direct competitors and that employ people in similar jobs to the one you are hiring for, and find out what they are paying. Additionally, certain websites, such as the Canadian Salary Guide at Payscale.com, provide data regarding salary ranges for various job titles.

Estimate Return on Investment

Employees should make your company more money than they cost. One of the most effective ways to set salaries is to work backward by estimating how much you expect a new hire to make your business, determining what return on investment you want from the employee, and then calculating the employee’s salary from there. For example, suppose you are hiring for a sales position, and the job description includes a yearly sales quota of $300,000 in revenue – in other words, to keep the job, the salesperson is expected to make the company $300,000 per year. Also suppose that you are hoping for a 300% return on investment from hiring that employee. Therefore, work backward: $300,000 divided by 3 is $100,000, which should be the salesperson’s yearly salary.

Negotiate Effectively

Effective negotiation requires doing your homework in advance and having an effective strategy in place. First, determine the total cost you’re willing to spend on an employee in a year. This cost includes salary, benefits, bonuses and so forth. Suppose that amount is $100,000 per year. Next, formulate your negotiation strategy. Obviously, you don’t want to offer the new hire a total compensation package of $100,000 off the bat; you would have no room for negotiation when the candidate bargains for more. Smart negotiation strategy entails determining the lowest salary you can offer the employee without insulting them, and starting there. The employee assuredly is going to counter, and eventually you’ll settle on a figure somewhere between your initial figure and their initial figure. Negotiate properly, and you’ll arrive at an amount that is lower than the $100,000 figure you identified as your maximum spend.

References & Resources

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