How Much Should You Pay Your Employees?

If you’ve been through some of my other presentations, you know that being cheap is an important way to succeed and even survive in business. So my advice on salaries may at first seem to totally fly in the face of this.

I suggest you pay your people well!

By doing so, your total employment costs over time may end up being a lot less than if you didn’t pay your people well, and your chances of outstanding business success will be much, much higher.

For example, you might decide that you are going to pay at least in the upper half of the going wage range or even in the top 30 percent of the range. Paying people can actually save you money! How? If you pay your people a slight premium to the going or average marketplace wages, you should be able to hire better people—people who are likely more talented and capable, more motivated, more enthusiastic. You will likely have a better work atmosphere and team environment with people who are more likely to stay with your company for a lot longer.

People you pay a little more for will typically work not just a little harder, but a lot harder than average employees. They will typically work not just a little better, but a lot better than average employees. The company atmosphere will be better, and you will have less turnover. So by paying people a little premium, your total wage costs may actually be less than if you didn’t.

And while this is especially important for positions where the quality of the work will most directly impact overall performance of the company, to at least some degree, every position impacts performance. And every person in every position also impacts company morale.

How Do You Determine the Going Wage for a Position?

Large companies spend a lot of money hiring specialized compensation consulting firms that provide them with highly detailed salary surveys or even produce a customized one for a particular position. Your industry association or the trade publication or website serving your industry may have comprehensive salary surveys. There are some commercial websites that offer some salary survey information for free.

You can also look at what other companies are posting for salary ranges for job openings. You can ask other firms in your industry what they are paying for similar positions. And finally, you can note the salary history and expectations for candidates you are interviewing for the position.

Pay the Person, Not the Position

In small companies, employees are often responsible for multiple tasks, or their performance is expected to make all the difference in the overall performance of the company. In this situation, you should focus on an individual’s contribution to the success of your company, not the job title.

Some companies, for instance, might even place a top salesperson on an incentive pay plan that allows him or her to potentially earn more than the president of the company. For example, at my grandfather’s shoe manufacturing firm, the sales manager earned more in total salary and bonuses in some years than my grandfather did. 

Conduct Annual Performance Reviews

People expect to be reviewed every year. If you review their performances and salaries less often, they are bound to be disappointed. Some companies review people on the anniversaries of their hire dates. As much as possible, however, you should arrange to review all employees at the same time on the same date each year. Otherwise, as the company grows, you will always seem to be reviewing employees and will distract your other workers. 

Compensation Is a Hot Button

Think about compensation carefully before you act. If you offer a candidate too much money or increase an employee’s pay too much, the mistake will follow you as long as the employee is with the firm. Base pay and any change in base pay establish a basis for future increases.

On the other hand, if you offer a candidate too little money or raise an employee’s wages by too small an amount, you run the risk of losing a good candidate or a valued employee. Some employees will speak up and complain about an unsatisfactory increase. Others may just quietly start looking for another job.

Compensation Is Not Just a Retention Issue

I see many employers, especially those at small businesses, give their employees lousy increases because they assume that employees will never leave the company. And they may be right, but they sure aren’t going to get the full level of commitment from their employees that they would have gotten had they paid them what they really deserved!

I see paying people well or above average as a shrewd investment. And, believe me, it is one of the very few areas of running a business where I don’t like to skimp. Time and time again, I have surprised top-performing employees with big, fat pay increases—much more than was necessary to retain them, but nonetheless well deserved. I love giving great pay raises—and I know that the money will come back many times over in stronger commitment and dedication to the business.

Takeaways You Can Use

  • Better wages means better people.
  • Paying people a premium can actually reduce your total wage costs.
  • Pay the person, not the position.
  • Compensation is about motivation, not just retention.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.