How Are Salaries Determined?
Salary contributes to employees’ loyalty and motivation. It makes them feel valued and should be reasonably determined. Whether you work in HR or you are considering a salary offer. In this article, we discuss everything you need to know about determining salaries.
Who decides how much people earn?
Employers decide how much they pay their employees by establishing a salary range. A salary range consists of a minimum pay rate, middle-range possibilities for pay increases and a maximum pay rate. Individual employers can also set pay rates and salary ranges by recognizing the experience, skill and education an employee needs to perform the job. They consider the potential salary increase they will offer for a promotion to set the salary range minimum and maximum.
Many companies contribute to market pay studies, and these data help to determine what employers pay to people doing similar work in a similar region and industry. Employers use market data to inform their decision regarding salaries.
What factors help determine salaries?
After careful consideration, employers will decide upon the budget they have for a given position. Here are some factors the help determine salaries:
- Data from market surveys: Employers contribute market pay studies and share their pay rates for similar positions in similar industries in the same area.
- Demographic and market factors: Salaries are impacted by market and demographic factors like the availability of jobs, the number of available candidates for a particular job or the number of employees looking for the same education and skills.
- Fair compensation: Large organizations establish salaries by looking at the relationship between different jobs and what is needed to perform the job, so they offer fair compensation to employees.
- Budget availability: A company will have to determine the budget they have available for each role.
How does HR determine salary?
When determining just exactly what a budget should be for a job opening, consider this list of steps to help determine the salary:
1. Evaluate the position
Start by assessing the value of the position. First, look at what the position demands. You can start by writing a job description that explains the responsibilities and duties of the job. In that job description, also precise the job title and any other relevant information. Then, estimate the value it provides to your business. You can ask yourself how much time and energy it requires, what certifications and experience are necessary to accomplish the job. Then, think of the highest salary you would be willing to pay for someone who can cover all those demands you just assessed.
For employees who don’t generate revenue, like administrative or support staff, consider the money they allow you to save. Ask yourself how much it would cost not to have them. For example, if executive assistants were not working for the company, executives would take more time to answer basic requests, and organize travel arrangements. All that time can be saved and invested in making strategic decisions for the company.
By assessing the demands and benefits that a position brings to the organization, you can find the ideal employees for that position and the best ways to compensate them.
2. Perform wage research
Researching the median salary for a particular position helps evaluate what employees expect to make and offer competitive pay. It also helps to estimate if your business can sustain the wages for the job. Here are some valuable sources:
- Specialized websites provide information about salaries competitors pay for similar positions. Recruiters and headhunters are also a good source of information and can advise you appropriately.
- Networking groups or other business owners can share their experiences with pay scales.
- Your local chamber of commerce can provide salary data.
3. Determine the minimum and maximum
Now that you know the position’s value and the median salary, it is easier to determine a minimum and maximum. To determine the maximum, think about the job’s value and the highest amount you are willing to pay for it. Although to create a lasting position, it is essential to make sure that your business can support the salary.
To determine the minimum, you can base yourself on the market rates since it is what employees expect. Consider the competition factor when determining the bottom of your scale. It is essential to be mindful of the potential harm it would cause the business if the potential hire would choose a competitor over you. If the risk exists, then the offered salary should be the highest. On the contrary, if it is easy to find someone to fill that position, the proposed salary can be the minimum. These parameters can help to determine a margin for formulating an offer.
4. Align with the human resources strategy
Suppose the strategy of HR is to develop an exceptional, highly-skilled workforce. In that case, salary should be above the industry or regional averages to attract quality employees. Offering lower wages than comparable companies could fail the mission of creating a superior workforce.
On the other hand, if the strategy of HR is to hire quickly for lower rates without much concern for company turnover, you may be able to offer a lower salary.
5. Define the work culture
The pay system helps the employer create the desired work culture. It is not only about rewarding individuals for their solo performance. It is about developing a team environment. It is essential to define the work culture you want to create and make sure the salaries correspond to the employees’ contribution to that culture. For example, suppose your work culture promotes work-life balance and family values. In that case, you want to include a generous parental leave convention in the compensation package.
6. Choose a payment method
Payment methods include how often you pay, like hourly versus salary-based. Still, it also refers to the different ways to reward employees. Hourly pay usually applies when the performed work is linked to time. For example, assembly line workers’ productivity is directly proportional to hours spent on the line. Therefore, they receive hourly wages.
On the other hand, salary-based job employees receive the same amount in every paycheck. It applies when it is easier to assess the work contribution in results than in hours. Finally, for jobs that contribute directly to the company profit, commission-based salaries are more common. Their pay is directly proportional to the revenue they bring in.
Depending on your industry, you might need to discuss with unions or lawyers to ensure you choose the right compensation. They can inform you about potential restrictions, pre-determined minimum wages or overtime pay.
7. Add benefits
Some companies offer modest salaries but bundle that with other interesting benefits. You can use that method to help you stay closer to your minimum salary amount. Attractive perks often encourage potential hires to accept a lower salary than they would ask without these benefits. Employee benefits include bonuses, health insurance or stock options.
Bonuses are direct revenue incentives. If the company makes more profits thanks to its employees’ contribution, it distributes part of it to employees as a bonus. It motivates teams to work for the good of the organization.
8. Be open to negotiation
Employees who are comfortable with their worth don’t hesitate to negotiate, so you need to prepare for that possibility. If they possess professional assets that can positively impact your business, be open to negotiating. When you find compromises during negotiation, acknowledge their value. The employees are more likely to be loyal and perform well as a token of appreciation.
