Given the tight labor market of today, many companies struggle with the issue of how much to pay employees. You certainly want to pay someone based on the value they provide the company, but how do you decide exactly what that amount should be? You would probably agree that paying your office manager $100,000 per year may be paying more than the value they provide. Similarly, think what would happen if you were to pay a sales representative $20,000 per year when they brought in a million dollars in revenue. You probably would not have that sales representative on your payroll very long because they would feel underpaid for their contribution.

You also want to pay someone what is considered competitive in order to attract them to your company and keep them on your payroll. Keeping top-notch employees today is particularly challenging, given the stock option craze and base salaries seeming to be going out of sight.

There are several ways to find out what the market is paying for employees. Some of the methods are salary surveys, general networking and newspaper advertisements. These techniques are especially useful for the business owner who probably does not have a lot of time to devote to learning about this subject, nor can they afford to hire one of the nationally known compensation consulting firms.

Salary surveys can be a good place to start. Many industry associations conduct surveys for their members. The Internet is filled with surveys on salaries paid to all types of employees. Sometimes, a local chamber of commerce or business association can provide some basic data as well.

Not all surveys provide reliable information, however. Consider that job titles are used to describe the position’s responsibilities; however, rarely does the title at one company mean the same at another company. At small companies, many people wear so many different hats, it is hard to use someone’s title as an accurate description of what they really do; hence, salary surveys reporting this information can be suspect. When assessing the reliability of a survey, consider who conducted the survey and how the information was validated.

General networking among your business peers, vendors and sometimes even your customers can be helpful. Asking your banker, lawyer or outside accountant can also provide some useful information. They may deal with other companies like yours and would be glad to make an anonymous inquiry on your behalf. You can also call some specialized headhunters and ask them for information. They will generally provide you with information that is fairly recent, because they are in that business. Some of them even publish salary surveys. Thinking they may get your business, they are generally happy to help with information.

You can also post the question on any number of Internet sites that have message-posting boards for small business.

Check out the classified ads in your Sunday newspaper or industry publication to get an idea of what some other companies are paying. Usually, the advertisement provides some sort of a description of the position as well, so you can be assured you are comparing like jobs. If a job sounds like it is a good match, but they do not provide any salary information, why not call them as if you were the candidate and ask for the general salary range for the position.

Some other considerations you may have when establishing employee salary levels include:

  1. What is the value for the job a person performs compared to others in the company?
  2. How important are benefits to the employees. Can I add more benefits without having to pay more in base salary? Such benefits may be less expensive than a salary increase.
  3. How much can you realistically afford to pay? What impact would not having this person have on your business and how much is that impact worth to you?

Determining the right level of salary to pay is an art, not a science. In the end, you want to be able to attract and keep employees that will provide value to your business and your customers. In return for that value, you pay them an amount that reflects the value.