How a company sets a salary for its employees largely depends on its capacity to attract and retain talent. It’s crucial to find a balance between the employee's expectations, the average market rate, what the company is willing to pay for this position, and what they will get in return.
All of these factors come into play when negotiating a fair salary to get the kind of professional you need. It may sound complicated, but it’s all about setting a range with a minimum and maximum value.
We explain how to do this below.
The importance of setting an employee’s salary correctly
Offering a competitive salary is vital to attract and retain talent. According to a study shared by Staffing Industry Analysts, 73.8% of job seekers state that salary is the most important aspect when considering a new position.
While we do know that economic compensation isn’t the only factor and that others are becoming increasingly more important (the so-called emotional salary), it has a direct impact on the workforce’s well-being and satisfaction. A happy employee is up to 20% more productive (data from Forbes).
It’s the HR department’s responsibility to set employees’ salaries correctly and review them regularly to ensure that they’re all kept up to date, as far as remuneration is concerned.
If we don’t know how to set salaries for employees and we get it wrong, we risk facing some negative consequences. These include a higher turnover, poor employer branding image, low workforce morale and shrinking production levels. Some studies suggest that 25% of professionals leave their jobs to accept another that offers a higher salary.
Another consequence is that it could take a company longer to fill a vacancy when offering a salary that isn’t competitive. The longer this process goes on, the more difficult it is to find a suitable professional. What’s more, the costs involved will continue to multiply.
So, as we can see, offering a fair and competitive salary is important for so many reasons. And if the company isn’t able to offer the market rate, it can also offer other benefits such as flexible working, more holidays or opportunities for professional development.
8 essential factors when determining salary for employees
As we said in the beginning, many factors influence how to set a salary for employees. It’s vital to get a complete overview of these to ensure you offer the right amount.
1. Research average market salaries
The first step in determining a salary for employees is to make an industry comparison; in other words, find out how much the competition is paying employees with the same characteristics.
Salaries can vary according to the size of the company and geographical location; even so, you’re only looking for benchmarks at this point.
If you have contacts within the industry, you can ask them directly; if not, the other option is to check LinkedIn Salary. Enter the job title and location on the platform and you will get data about the average salary for the job. It’s a free tool, although you have to enter your own salary first to get one year’s free access.
2. Set a salary range for each position
Setting a minimum and maximum salary for every position in the company is vital to maintain coherence across the organisation.
For example, if you’re looking for another member for the web development team, make sure that the salary you offer is within the same range as their colleagues. Otherwise, this could lead to problems and a negative atmosphere within the company.
In general, try to define a remuneration model with clear rules and criteria that enable you to set financial compensation objectively and uniformly. This will help you avoid arbitrary actions that could result in grievances about discrimination.
3. Analyse the economic efficiency of each position
An employee’s salary is like any other investment a company makes: it is expected to yield a return. So, on this basis, we need to set a maximum limit to what we can offer.
The best way to establish this limit is to ask ourselves “how much will this person contribute to the company?” This value should be the maximum amount we should pay this employee.
Arriving at this figure is easier in the case of a salesperson, for example, whose job is to generate sales income for the company. If they are capable of generating annual sales of €100,000 or more, then it would be fair to pay them €40,000 plus commission.
However, the value of some job roles isn’t in the money they generate, but in the money that they save the company. Take an administrative position, for example. This may be a key role in a company, but, in many cases, it would be impossible to justify a salary of €40,000.
4. Describe employees’ job responsibilities
When defining your company’s remuneration model, it's important to describe employees' job responsibilities and clearly define their level of authority and in which areas, to justify a higher salary.
So, defining three levels of experience for each position can be useful here: trainee, junior and senior. Each one will have set obligations and objectives.
Your company’s career plans should also determine what milestones employees must reach to get a promotion from one level to the next. These could relate to how long the employee has been in the company, education, experience or based on their accomplishments.
All of this should be well-defined so that employees know how they can achieve promotion within the company. Likewise, HR has a specific plan to work with.
5. Evaluate the employee’s experience
Professional experience can be a differentiating factor. Someone new to the industry is not the same as a professional with extensive experience, contacts, knowledge, etc. It’s crucial to consider this when offering someone a job. As you’ve already set a salary range, you can adjust the offer according to the candidate’s experience.
This way, people who bring more expertise deserve to be better paid than those who are “starting out.”
6. Take the company’s location into account
The salary also has to correspond to the cost of living in the city where the company is based. For example, housing costs in London are far higher than those in smaller cities like Reading.
This year, for example, Facebook decided to implement a remote working policy and will adapt their employees' salaries according to the place they carry out their activity. If a professional is working from Silicon Valley, their salary will reflect the high cost of living in this area. But if they move to a small village, then they’ll most certainly receive a salary reduction.
7. Analyse the company’s financial capacity
Another fundamental factor is the company’s financial capacity to cope with their employees’ monthly payroll. And they not only have to think in terms of each employees’ gross salary, but also the total costs involved. For example, a professional that earns €1,750 per month, in reality, cost the company around €2,900.
We should always bear this in mind when calculating the total costs and check whether we’ve correctly estimated the true cost of an employee.
8. Employee expectations
It’s normal to ask a professional about their salary expectations, whether in a job interview or a salary review meeting. If the company can meet those expectations because it’s within the established salary range, all well and good. But if their expectations are much higher, then this may call for a rethink about the employee’s future, as they’re very likely to leave the company or accept a better offer.
These tips on how to set a salary for employees will help you create a remuneration model for your company, make an offer for a new candidate or to negotiate when promoting an existing employee.