How much you should pay your employees is a crucial challenge for most businesses, big or small. Managers always find it challenging to decide how much they should pay employees, especially new ones when joining the organization. If you are in this predicament, you are not alone. The good news is that there are core principles you can use to decide how much you should pay an employee. We will go through all the core principles used in determining how much you should pay your employee.
How much should I pay my employee: The affordability and sustainability constraint
Employers often ask recruits to indicate their remuneration expectations should they be hired. Some employers use this as a guide when deciding what to pay an employee. While this may assist a business in making a quick decision, employers must remember that prospective employees can bring wild figures unrelated to reality on the market. Employers using this approach as a starting point in negotiating pay with new employees must be cautious and focus on whether they can afford and sustain the proposed salaries. The challenge with employers making decisions on employee pay is that pay is always easy to give and hard to take away should the business fail to sustain the pay awarded to the employee. In making a final decision on how much you should pay an employee, always consider affordability and sustainability during the entire duration of the employee’s contract. This is imperative given that income or revenue fluctuates more frequently while employee pay must be paid whether the business is doing well or not.
Related: Frequently Asked Questions on Employee Remuneration
How much should I pay my employee: Consider the market
When prospective employees want to join your organization, they expect to be paid competitively in line with the market. Every job has a market salary or pay. As a business, you need to know what the market pays for any roles you aim to fill. Remember, by its very nature; the market will have low, average and high salaries. Where you decide to pay a particular employee largely depends on whether you can afford and sustain the market salary. In choosing how much you should pay a specific individual, it is better to target to pay the employee around the market median. This choice assumes that the market has a fair way of pricing jobs based on supply and demand. Therefore by paying the said employee at the median, you are paying better than 50% of the competitors for the same skill. You will have a 50% chance of retaining the employee after making such a pay decision. If you have stable revenue inflows immune from frequent fluctuations, you may want to target to pay in the upper quartile of the market. This way, you are assured that the employee is less likely to be tempted to leave your organization to obtain higher pay at another organization.
Related: Salary Range: Everything you need to know
How much should I pay my employee: Consider your internal policy
Big and formal businesses often have a pay structure which they use to guide pay decisions. This may not be the case for small businesses. When a company has a pay structure; which shows a grade, minimum, midpoint and maximum salary, pay decisions are much easier to make. When deciding how much to pay an employee, the correct principles are as follows:
- Pay new employees at the minimum or close to the minimum of their grade. The logic in making such a decision is that it is not advisable to pay a premium salary (i.e. a salary above the grade salary midpoint) to a new employee when you are not certain how they will perform. This principle is not always feasible when hiring experienced employees as they always demand market-competitive salaries. In such a case, you have two options. Option one is you should still pay them a basic salary at the grade minimum and give them the balance of the allowance that will be added to their basic salary once they have proven their performance capability. The second option is to pay them at the grade minimum and agree that their pay will be adjusted close to their expectations after probation once they prove they have what it takes to succeed.
- When deciding how much to pay employees already within your organization, these are employees with performance records known by the managers, the approach is slightly different. In this case, you consider performance records. Poor performers are paid close to the minimum and average performers slightly below the grade midpoint; pay above the grade midpoint for your consistent good performers. A word of caution, though; please note that employee performance is rarely consistent for all periods for various reasons. You will be destroying company value if you peg the salaries too high versus individual performance. Where you decide to pay an employee should consider this considerable risk.
- Do not pay any of your employees below grade minimum or above grade maximum. It is bad practice to do so as it will result in pay inequity within your business. Such practices can lead to staff turnover.
How much should I pay my employee: consider company policy
To make credible pay decisions for your employees, always have the policy to support the guidelines I have highlighted above. It matters in a big way to ensure that decisions about how much to pay employees are consistently handled to promote internal and external equity. Anything short of this will lead to staff turnover.
Related: Compa ratios - Everything you need to know
How much should I pay my employee: other considerations
I have noted that managers sometimes make arbitrary pay decisions when deciding how much they should pay an employee. Such decisions are often driven by personal preference and nepotism. Never be tempted to go this route as it creates discontent among your employees, which will affect the performance of your business.
When you think about “how much should I pay my employee” remember the cardinale principles in this article. Having a principle-driven payment model for your employees would ensure that employee see process equity in how salaries are set and paid. In addition it helps the organisation to maintain both internal and external equity.
Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.Email:firstname.lastname@example.org or visit our websites https://www.thehumancapitalhub.com/ and www.ipcconsultants.com