Every company is different, but small businesses are especially unique. When it comes time to hiring a new employee into a small organization, determining an appropriate salary or wage rate is not easy. There is no corporate HR department to put out a pay grade scale, the org chart is stored in your head, and a web search will likely reveal a huge range of options. Underpaying will result in turnover. Overpaying is just a waste of valuable cash. How do you tackle this issue to get that pay rate just right? Here are five factors to consider:  

1. The Labor Market  

There may be a lot of candidates out there when the economy is bad and the unemployment rate is high, however, don't assume that ALL positions will be easy to fill, and that a new hire will come at a 'bargain rate'. Any given position could be challenging to fill if it requires unique skills, industry knowledge, or significant prior experience. When you do finally find that needle in a haystack, be prepared to offer a salary that will meet their expectation and is in keeping with current labor trends. If you find that person to be a real find, other people in your industry might feel the same way. Choose a salary level based on what the candidate's other options are. A good interview question might be, "How is the job search going for you?" Their answer will provide a lot of valuable insight.

2. Internal Salary Structure

Large corporations have pay grades and ranges and targets for just about every position. Small businesses don't, however, small businesses still have a 'hierarchy' that a hiring manager needs to be cognizant of. For example, a part time receptionist better not be making more than a seasoned office manager. Or, a machine operator with one year of experience shouldn't be offered more than a supervisor. Take a look at the salaries already in place, and make sure that what you offer a new employee fits into that structure. Don't assume that employees won't find out what others are earning. Assume that they WILL, and make your decisions based on that.  

3. Total Compensation Plan

If your small business doesn't offer anything more than a base wage (no benefits, no vacation time, no training, no perks), then you may need to kick up that salary level in order to entice new employees to join your company. If, however, you offer a full benefits package, or flexible hours, or a casual work environment, or training opportunities, you will benefit by being able to offer a lower salary and still attract good people. Remember that the salary is only one component of why an employee chooses to come to work for you. Make sure that they are made aware of all of the ways that the company compensates them, even if it won't show up on their W2. 

4. Experience

You should pay more for more work experience only if you can use that experience to get greater results. If you are looking to hire a bookkeeper, pay more if the bookkeeper has twenty years of bookkeeping experience and your needs are complex. DON'T hire a bookkeeper with twenty years of experience if your needs are basic. You will pay a higher wage and won't get the benefit out of those dollars. In addition, don't fall into the trap of hiring a highly experienced person at an entry level wage just because they say they will accept it. They will accept it now, but will keep looking for a greater opportunity that will pay them more based on the experience that they have.  

5. Expectation

Individuals become accustomed to the wage levels that they earn, and often demand that they continue to earn at that level. However, that doesn't mean that their expectation is appropriate. Employees can become 'overpaid' if they have worked for one company for a long time. They get raises year after year without increasing their skills or responsibilities. If you hire an employee at a particular salary simply because that is what they have been making before, you may be over paying. Find an employee who is accustomed to making a salary in the range that you are willing to offer. They will be more satisfied, more committed to the job, and you will be getting value for the dollars you are spending.

Before you make that offer of employment, consider the factors above. Don't under pay, or you run the risk of turnover when an employee leaves for a better opportunity. Don't over pay, or you are wasting valuable labor dollars. The analysis isn't always easy, but taking the time to think through it will pay off in the long run. For further assistance with this topic, I would welcome the opportunity to help. Please contact me at any time.