How Much Pay is Enough Pay? Part 1 of 2

Article By: Bill Vogel
Posted: April 10, 2018
From: VirtualHRPros.com
 
Determining how much to pay new or current employees will depend on two primary planning phases. First, managers need to determine if they want to pay less, more or equal to their competitors. This is referred to as a company’s Compensation Philosophy. Second, managers might want to create Salary Ranges that provide minimum, mid, and maximum pay rates with explanations that justify pay rates for each position.
 
The compensations philosophy will first depend on the labor budget. Startups may only be able to pay below market or minimum wage. When businesses experience growth, it makes sense to increase pay rates to attract better talent and reduce turnover. Managers have four primary options for planning and designing a company’s  compensation philosophy:
 

1. Lag labor markets
2. Match labor markets
3. Lead labor markets
4. Combination of lag, match, and lead

 
To help identify market rates such as average pay for specific jobs in an industry and geographic location, several research companies provide salary market data using surveys, which can cost in the area $400 or more per job description. The Bureau of Labor Statistics  provides salary market reports free of charge, but the reports may not contain salary data in the current year.
 
Lagging the labor market – Another reason for paying less than market rates, besides being a startup with limited capital, companies may choose a plan that continuously pays below market rates.  For example, managers may provide variable pay such as bonuses, commissions, or piece rate pay in addition to a base salary or hourly rate. However, make sure the market salary data you are using to set pay rates does not include variable pay.
 
Matching the labor market – Managers may want to match the salaries that are offered by their competitors to help attract more job seekers and keep labor costs at manageable rates. However, managers will need to keep an eye on salaries paid by competitors because market rates fluctuate. This means that managers will need to adjust pay rates often to keep up with matching salary rates.
 
Leading the labor market – Paying employees above rates paid by their competitors is a winning strategy. This compensation philosophy attracts the best talent, helps keep morale high, and reduces turnover. However, this is an extremely expensive strategy.  Managers need to monitor this strategy to make sure they get their expected return on investment before it eats up revenue.
 
Combination of lag, match, and lead – A combination strategy helps save money and attract talent. For example, in a market with high unemployment, managers can attract several job seekers. Under this circumstance managers may want to adopt a matching philosophy. On the other hand, for hard to fill positions, no matter the unemployment rate, managers can adopt a lead philosophy to fill position quickly and with top talent for these positions.  
 
Compensation philosophies are not new, but managers need to justify how much they pay employees. Companies must adhere to fair pay requirements under changes in laws to stay out of legal trouble. In addition, managers in certain states cannot ask applicants how much they were paid in the past by previous employers. This law is gaining momentum, so it’s a good idea to start implementing pay policies starting with pay philosophies.
 
Next week, I will discuss the second the second planning phase, creating salary ranges. As always, get help from a qualified HR Professional if you think your business is at risk, or needs help developing policies, procedures, and training courses to assist with workplace compliance requirements.