How to Determine Employee Compensation

Jennifer L'Estrange
December 17, 2020

Employee compensation is made up of different structured components, some fixed and some variable, as well as a company pay policy that defines how competitive they want to be relative to the rest of the job market. In this article, we’re going to walk you through a high level process of defining and implementing a compensation plan for a startup or existing business that is hiring for the first time.

Write the job description

Before jumping to the job boards, the first step is to define the position that you are looking to fill. Typically a job description including information about the company, the key responsibilities that you need the incoming employee to manage and the required qualifications to perform the job satisfactorily. Without a good job description, you can’t post the vacancy anyway and, oftentimes, what you call a specific position in your organization is not at all the same as what someone else calls it. The job description provides important information and keywords for search that will help the right candidate find you and will also help you benchmark your position against other similar jobs to determine the salary range to attract and retain the right talent for your company.

Research and compare wages on the market

For companies that are just starting to hire, we generally start with loose evaluation of the competitive landscape to see where salaries are sitting. Start with some keywords from the job description and use them to search for similar positions. Start with a search in your geographical area, but if you are open to remote work options, open it up to a national search for comparison purposes. Base wage rates fluctuate across the United States by over 100%, from lowest to highest. To illustrate, the federal minimum wage for 2021 is $7.25 per hour, however can go as high as $15:00 per hour in some areas of the country and as low as $5.15 per hour in some states where the businesses are not subject to the Fair Labor Standards Act.

When you are searching for similar positions, make sure to search for a few related job titles as well as review differences for company size. Larger companies tend to pay more than smaller ones, however small businesses can make up for the shortfall with variable pay, creative benefits and perks that larger companies often struggle to implement successfully. LinkedIn, Indeed, Glassdoor, and Payscale all offer salary search options on their websites for free. There are several others that offer job evaluation services for a fee.

Once you have surveyed the market a little and determined where candidates expect to be paid, set an initial base salary range that also takes into account the experience level of the person you are looking for AND the relative salaries of your existing employees if you have any. While you do need to be competitive to hire the right talent, you also need to be mindful of internal equity and how your pay policy plays out across the company. Big gaps in pay for positions that contribute similarly to business results creates a perception of inequity and will demotivate employees who are paid below their peers. And, if you think they’re not talking about their pay, you’re wrong. 

Assess the Value of the Position

Internal equity is important, so what does it mean? In a nutshell, it is the relative measure of contribution from one position to another. It is how we know how much to pay the staff accountant compared to the marketing analyst. Some companies have a formal methodology for evaluation jobs, however smaller companies are less likely to have formal structure in place. Rather, they will use the market to set the salary range and then evaluate individual positions and incumbents based on experience level and, depending on the job, possibly specialized skills. 

If you are doing this for the first time, start with market based salary ranges and back into a target base salary by lining up the jobs across the organization looking at the relative financial, operational and people impact to the business. You can also get more information on how to do this, as well as an overview of variable pay, in our white paper on compensation strategy.

Determine A Compensation Structure

Next we’re going to create two key documents: the salary bands for base pay and the targeted total rewards mix for each level of the organization (or band).

What’s a band?

A salary band (or grade) defines the targeted minimum or maximum that you are supposed to pay for a position at a given level. Some jobs can cross two bands and some bands are very wide. We have a templated salary structure that suits most startups in the US and that you are welcome to use as a starting point. Contact us for your complimentary copy.

What else goes into total rewards?

This is where the magic happens! Commissions, bonuses, long term incentive compensation, profit sharing, stock options and grants, health insurance, retirement plans, paid vacation, company cars and other equipment, subsidised lunches, pet policy, and other policies that impact the ways of working all play into retention strategies that make a real difference. Keep in mind when you’re designing your compensation plan that it’s alot easier to add new compensation programs to the mix than it is to take them away. Also, and importantly, it’s not all about the money. Culture and values creates employee engagement. There’s always another company out there with a better ‘deal’. The real goal is to create an organization where you’re people aren’t even looking to go anywhere else.

How Red Clover Can Help with Employee Compensation

We work with small and medium sized businesses to help them create and implement compensation strategies that help them scale. We focus heavily on variable pay plans that create a line of sight to business objectives and align employees to a set of goals that move the organization forward, together. We advocate for compensation transparency, simple clear communications on how comp works and rewards programs where everyone wins. Contact us to learn more.

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