Compensation: Know the Market and the Law

 Compensation: Know the Market and the Law How much is an employee worth? Learn how to determine an employee's value and understand compensation laws.

If there’s a number in business that is intensely personal, and is often a source of conflict, it’s what we’re paid. Hi, I’m Ed Boylan.

What are Compensation and Job Classification?

I’d like to talk to you about two important HR functions. One is compensation, or wages; what we pay people. The second thing is job classification. Every company, whether it’s a startup or an existing company, has a definite internal economic reality. This simply means that for whatever series of reasons, there’s a finite number that you can spend on payroll. And once that decision has been made, whatever the number is, it should be in the rearview mirror you shouldn’t agonize over it or second-guess yourself.

If you’re a startup trying to develop a funky all-natural soda in your basement, you cannot be worried about Coca-Cola pays. That said, despite your economic reality, understanding what’s being paid in the local marketplace for similar jobs is very very useful. If nothing else, having it in mind when making an offer to a candidate. And keep in mind but you do need that written job description.

See Also: Interviewing Job Candidates: Best Practices & Tips

Matching Compensation to Similar Job Descriptions

A fundamental part of compensation, even for billion-dollar companies, is called Match. A lot of websites out there that can help give you for free good ballpark understanding of what the market is paying for similar jobs. Matching the functions, the tasks, the responsibilities, the education of your job to what is listed on those websites is very important – otherwise you’re comparing essentially apples and oranges and not getting a good number.

It’s very important to realize that paying people who do the same job, or essentially similar jobs, very differently can create both internal problems (such as employee dissatisfaction) and external problems, perhaps discrimination cases. Court cases and laws that do impact how you pay people and how much you pay people who are essentially performing the same or substantially similar jobs came about when racial minorities were paid historically significantly less than non-minorities, or when women were paid less than men. And while there are many factors that will explain why there are differences it’s best for you to know, first, that there are differences, and second, to have those differences evaluated by a HR professional or by an employment law attorney to avoid legal difficulties.

Outline Qualitative and Quantitative Benefits as Part of a Compensation Package

Now, while compensation is an important thing, it’s not the only thing. There are a lot of other things, both quantifiable and qualitative that are going into a person’s decision to work for your company. These elements may not be sufficient to bring a person aboard, but don’t discount them: make them part of your total sell. Whether the things that you are offering are quantitative, such as subsidies or buying lunch, or qualitative such as being able to work off-site for certain percentage of the time, or having flexible schedules. Write them down, and talk them up with your candidates. Sell your entire package.

The Importance of Job Classification

Returning to the second of our topics: job classification. Remember in school when teachers said, “pay attention, class!” That meant there was something really important that was probably going to be on the test. Well, this is an area – how you classify your jobs – where bad decisions, or incorrect decisions, can be truly expensive.


Classification refers to two areas typically based upon regulations – largely federal – that determined if somebody must be an employee, or could be retained as an independent contractor. And secondly, whether a job must be paid overtime. There are a lot of regulations, typically on the federal level although some states have some very stringent regulations, that have tests or questions that which, when answered, will determine whether a job must be an employee or potentially could be an independent contractor. What you want do is have your written job descriptions, and have an HR professional or an employment law attorney evaluate them and give you guidance on these areas.


Now on to our second element: whether you must pay overtime for a particular job. “Over time” technically refers to all hours worked in excess of 40 in a seven day work week. Regulations specify that if you’re paying overtime is going to be 1.5 times employees base hourly rate. Where companies get themselves in trouble in this area most typically, is they pay a salary: a fixed amount for all hours worked in a week. Simply stated, how you pay them has absolutely no bearing on whether they are eligible for overtime.

The Federal Department of Labor has a very specific and detailed set of rules to evaluate whether a job should be paid as hourly or can be classified as “exempt” – meaning, exempt from the requirement to pay overtime for hours worked in excess of 40 at a standard seven day work week. The regulations also specify that even for jobs that are exempt, they require a certain minimum salary be paid, so you have to do both things.

Keeping Your Business Out of Court

Every day huge corporations and small ones pay mega fines in judgments against them. Back pay awards for unpaid overtime, for improperly classified employees is usually 2 times the amount of hours times 1.5 the hourly rate going back for two years.

In summary, have an HR professional or an employment law attorney evaluate all your jobs in both of these areas: whether jobs are properly classified as employee or independent contractor, and whether they are classified as to whether they must be paid hourly wage or paid overtime. It’s a prudent investment.

About Ed Boylan

Human Resources is one of those functions that many businesses – especially startups and small firms – wrestle with. HR has the capacity to make tremendous contributions or be a source of significant liability.

With 42 years of “experience, insights, and scar tissue,” Ed Boylan has seen the evolution of the Human Resources function and managed it in companies from a few hundred to 55,000 employees, from one state to 50 state operations. As a senior manager, he’s wrestled with business problems in the retail, distribution, hospitality, services sectors and continues today as Principal in his own consulting firm. He believes that understanding the fundamentals of what HR is can avoid potentially costly problems and provide a foundation for integrating it into a business plan.