Lessons and stories about business operations related to managing, leading, and developing people.

7 Questions You Need to Ask Yourself About Employee Compensation

Am I Paying My Employees Too Much, Or Not Enough?

Attracting and retaining top talent is a critical part of running a successful organization—and your job. Some might say it’s the most important job of anyone responsible for human resources and/or operations. And in today’s competitive environment, salary negotiation isn’t simply a matter of finding a dot on a grid and calling it a day. Factor in a whole host of new organizational styles (hello, holacracy), remote offices, and salary transparency, and figuring out how much you should be paying your employees can get pretty complicated. Sometimes, it can be downright uncomfortable. But fear not, regardless of your budget, location, and org structure, salary negotiation, budgeting, and benchmarking don’t have to feel like you’re staring down the mouth of a lion.

Here are some questions to ask yourself about the salaries you’re paying, and how to course correct any costly mistakes.

1. What’s ‘normal’?

This is probably the first question most of us ask ourselves when we’re thinking about how much we’re paying employees. Normal is a relative term, but it’s a good idea to set some benchmarks for context.

  • What do other people pay?If you’re building a team from scratch, or hiring for a position you’ve never hired for before, consider doing your research. The U.S. Bureau of Labor Statistics, “produces wage information for thousands of jobs according to occupation, industry and locale”; you can also cross-reference PayScale.com, Salary.com, and Glassdoor.com to get a better understanding for average salaries for various functions. It’s also always a good idea to reach out to professional contacts at other companies in your industry and area to see if they’re willing to share any (non-confidential) info. You might be surprised by what you learn.
  • Where do we stand now?If the last time you reviewed salaries was over six months ago, it’s time to do a fresh sweep. When markets are hot, it’s important to regularly assess how you stack up to other companies to ensure you can compete for and retain top talent. Take a look at historical pay of your employees, then compare that to your budget and see where you have wiggle room, how you’ll accommodate a new hiring plan, etc. Here’s a great introduction to salary benchmarking.
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2. What about location?

Is your company based in San Francisco? De Moines? Minneapolis? Toronto?

Am I Paying My Employees Too Much, Or Not Enough?

Your location plays an important role in the salaries you can choose to pay. In a competitive market, you’ll have to pay employees more, regardless of the role, but in a less competitive market, you’ll be able to factor in cost of living expenses and likely pay a good (but lower) salary—or compensate with better benefits (more on that later). Use a salary relocation calculator to get a better sense for how much you should be paying employees around the country. FWIW, a customer service manager moving from Atlanta to San Francisco currently earning $35k/year will need to make (a minimum salary of) $57,777/year to maintain the same standard of living. But take that with a grain of salt: the high end of this pay range is closer to $80k/year.

When creating your hiring plan, assess your organization’s needs: do employees need to be FT and on-site, or do you have flexibility to hire freelancers and contractors? Which positions require experts and specific vocational skills and training you’re not willing to invest in and would rather hire out for? Does it make sense to consider investing in a co-working space for workers in another location, or opening a small, focused remote office?

3. How much is this person worth?

An experienced employee can be both invaluable and extremely costly to your company so you’ll have to think and long and hard about how you’ll compensate her. Here are some questions you’ll want to ask yourself:

  • What is the minimum and maximum amount that I am willing to pay for this employee?You’ll want to take into account a number of factors including: Could the “potential hire put you at a disadvantage by working for one of your competitors”? Is this person uniquely suited to do a job that would otherwise be very difficult for you or another person at the organization to do? In these instances, it may be worth paying the (reasonable) max you can afford for this employee. Just remember to leave room for negotiation! Inc. suggests that meeting employees halfway can often lead to both appreciation and company loyalty (which will save you $$$ in the long run).

You’ll have to weigh a lot of factors, including the fact that making the wrong hiring decision could cost you 213% of the salary you choose to pay. On the flip side, however, a successful hire could ultimately outperform mediocre employees tenfold, while making only 20 to 30 percent more.

4. Should I set salary bands?

Salary (or pay) bands are not unfamiliar territory for anyone who’s worked at a big company. They’re determined by a combination of “experience, education and responsibility within the organization” but before you set a formal pay band at your organization consider this: while they may be helpful to you, they’re often seen as arbitrary to employees. Setting a pay scale can help you set a salary budget, but you shouldn’t rely on it as crutch when it comes to salary negotiation with employees.

To avoid shocked reactions to salary discussions, the U.S. Small Business Administration recommends that you come up with very clear job descriptions, advertise salary ranges for positions that leave room for negotiation, and factor in your own evaluation of whether you want to hire a more or less experienced employee for a given position.

As with all things in the modern workforce, flexibility is key. So go ahead, come up with a pay scale/salary band to keep you grounded, but remember that you’ll likely need to adjust accordingly and be prepared to answer questions that will inevitably arise when your employees talk amongst themselves and potentially uncover some major salary discrepancies within their groups.

5. Is salary transparency a good idea?

As modern workplaces evolve with life and times, you’ll likely find yourself coming across new practices, systems, and ideologies that may make salary setting and negotiation even more complex. In 2013, Buffer announced that it was publicly disclosing the salaries of all of its employees. The company later came up with a revised policy and salary formula. The highest paid team member (the CEO, based in New York City) gets paid $218,000/year. As you can imagine, there are numerous pros and cons to being transparent about the salaries you pay. Proponents of the practice would argue that this sort of transparency decreases opportunities for discrimination and negates some of the downsides of negotiation. Ultimately, you’ll need to ask yourself a lot more questions to help you decide how transparent you want to be about the salaries you pay.

In the meantime, here are a few additional resources you can check out:

6. What about compensation beyond salary? The 3 E’s

Am I Paying My Employees Too Much, Or Not Enough?

What do I have to offer beyond salary? Stock? Great healthcare benefits? Flexibility? A dog-friendly office?

Here’s a little secret: you don’t necessarily have to have deep pockets to attract talent. These days, many workers — particularly millennials — place value in non-monetary incentives such as flexibility when it comes to schedules and time off. What’s more, candidates are increasingly thinking about their next career opportunity as a chance to optimize for one of the 3 E’s: earnings, equity, and experience. As you think through your hiring plan, consider the mix of 3 E’s that you’re providing your candidates. Depending on where they are in their life and career, one of these will outweigh the others when it comes to choosing their next role.

  • When switching career paths or industries, experience holds higher value because it paves the way for growth. Same is true for first-time job seekers.
  • A position that doesn’t leave much room to fail or learn can come with higher earning power. More seasoned candidates may place more value in this.
  • Beer Fridays are fun, but if your company presents long-term earnings potential, offering a better equity package can be a good tradeoff for lower salary and outweigh ‘fluff’ benefits.
  • Some candidates may place more value in commuter benefits and free lunch while others — like working parents — will appreciate a more expansive health care plan and/or flexible work schedule.

7. Holacracy: what is it and why should I care?

Am I Paying My Employees Too Much, Or Not Enough?

If you don’t already have a lot to think about when it comes to gaining a deeper understanding of salary standards and negotiation, a new management system called Holacracy is putting traditional (pyramid) hierarchy on its head and calling into question a lot of what we know about management and pay. Made popular by Zappos and Medium, Holacracy discourages companies and employees from sticking to the rules, so to speak, and rather encourages both to ditch traditional job titles and structure. These organizations focus on helping employees find their own paths. Compensation is still role-based, but opportunities for growth abide.

What does this mean to you? Well, unless you’re about to switch up your org chart, it’s simply a reminder to yourself to think outside the box, even when it comes to salaries. Ultimately, your goal is to motivate great people to do their best work and as it turns out, there are many different ways to do this.

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