Whether you’re the owner of a start-up or your business has grown to the point that you need to create a structured pay classification for your employees, determining salaries that are fair, market related, and appealing is crucial. In the US, the average weekly pay is $1,070. However, this obviously fluctuates greatly depending on the role filled, the type of work undertaken, the skill and experience of the employee, and the hours filled. This means that you’ll need to work out numerous variables to arrive at a pay rate for your employees.
But where do you start?
Trying to guesstimate staff salaries or taking your cue from a prospective employee is never a good idea. Doing so could harm your organization in the long run, as paying your staff too much or too little can affect your company’s ability to attract and retain skilled and qualified talent. Determining an appropriate employee pay classification is also necessary for cash flow and budget management and is essential to maintain high productivity.
Here’s how you can determine the best possible pay classifications for your organization and drive retention. boost productivity, and maximize profits all at the same time.
Summary of Pay Classifications
When creating pay classifications for your employees, you decide on a range of salaries you would pay a new hire for a particular position. While the average US salary can work as a benchmark, you need to determine the average for your industry and sector to truly determine a market-related value. Your range should include the minimum and maximum compensation you would offer a candidate for the job.
The lower end of the pay classification, or salary scale, indicates the amount you would pay a new hire with the minimum requirements for the position. The higher side of the scale is how much you offer someone who fulfills all the job requirements and whom you believe to be a great hire. At the very top of the scale should be the rate you’ll pay an employee that’s an exceptional hire, or even a unicorn. Having this room for negotiation can ensure that you secure top talent within your budget.
Pay or salary bands also influence pay classifications. A pay band is a group of similar jobs paid within the same wage or salary range. To create pay classifications, businesses typically use a combination of the average compensation for a job, the location of the company, and the salary band relating to that position.
The Value of Creating a Pay Classification for Your Employees
Creating pay classification structures might seem tedious, but developing fair and market-related compensation packages is worth the effort for every organization, big or small. Your employees are your most valuable asset, and they deserve to get fairly compensated for their work.
You can follow this step-by-step process for creating your pay classification system. Once complete, you will have a solid framework for all employee salaries, which you will only need to review occasionally.
Do Your Research
If your aim is to attract and retain exceptional talent, your salary range should align with what other companies pay their employees in similar roles. If possible, consult with any connections you might have in the industry to get an idea of compensation amounts.
Next, study job listings and career platforms, such as LinkedIn, Glassdoor, and Indeed to gain insight into the average compensation for that position nationwide. Other valuable resources are the U.S. Bureau of Labor Statistics, Salary.com, and PayScale.com.
Narrowing your search by location is also helpful because it relates to the cost of living. This will influence whether your prospective employee considers your offer realistic and suitable for their area. Small, rural towns typically have a lower cost of living, so a new hire may expect a lower salary than one from a large city.
Finally, consider the prospective employee’s level of experience, as professionals with many years on the job will require better compensation than entry-level staff members. Employees who hold degrees or other job-related qualifications or special skills will also demand higher salaries, so you need to take this into account too.
Build a Detailed Job Description for Each Position
Writing detailed job descriptions is the real legwork when creating pay classifications. However, you can collaborate with the relevant managers in charge of that particular job and the HR team. They will have a clearer and more detailed picture of what the position entails. Besides, being an inclusive and collaborative leader inspires and motivates employees to work well as a team.
Together with the relevant managers, write a detailed list of all duties a person in that position must perform. In addition, list all skills and qualifications necessary for the job, and assess which pay band the post falls into.
Once you have your job description in place, you can not only use it to determine an employee’s pay grade, but you can also use it when looking for new hires and to measure performance.
Assess the Value of Each Job
Depending on the market you operate in, there are some jobs in your organization that may be incredibly valuable, yet you don’t realize their intrinsic worth until you scrutinize them closely. This is why knowing the value of a job (and the employee that fills the role) within your company is crucial to determining remuneration.
To determine the value, you’ll need to compare various positions using criteria such as effort required, necessary skills and knowledge, responsibility levels, and the effect on revenue.
This task is sometimes tricky, as it can be difficult to separate the position from the employee for an unbiased evaluation. Hiring an external organizational expert could be valuable to gain objective assessments, especially if you have seemingly smaller roles that actually play a major part in your ongoing operational success.
Determine the Form of Your Pay Classification
You can create your company’s pay classification systems in two ways; using benchmarking or according to pay bands. Most companies use both methods to determine a median wage.
How Benchmarking Aids Salary Scales
Benchmarking refers to assigning salary ranges based on current market trends. Regularly reviewing market-related salaries helps you to keep your salary scale relevant. If salaries are too low, you’ll not only miss out on attracting top talent; you may also experience higher employee churn rates as your staff seeks out better pay elsewhere.
Setting salaries slightly higher than the current trend is a good idea, as it can attract and retain top talent. However, this must fit in with your company’s budget, and you must be able to maintain the rate of pay, as well as allow for potential increases over time.
The Benefit of Pay Bands
When a group of positions falls into one pay band, the salary scale is easy to set up using the minimum and maximum wage for the jobs in that category. Grouping the positions into pay bands allows for fewer and less complicated levels of payment.
These bands also create consistency and fairness in an organization, and they allow for a degree of flexibility. An employee can fit into the lower or higher part of a band depending on their skills, experience, and length of service. These bands also give you a clear idea of what employees’ future increases may look like and can help you to create more accurate financial forecasts.
Choose an Appropriate Salary Range
You’ve completed your research on pay rates in the industry and set your salary scales. However, you must still assess your company’s finances to decide whether you can meet or exceed the market-related salary for a specific position. It’s important to offer market-related salaries if possible, but your business must be able to afford the total cost.
Include Benefits in Your Pay Classification
Budgeting for compensation involves more than just a base salary. You must factor company benefits, bonuses, incentives, and future increases into the mix. Benefits specifically are important, as they play a huge role in attracting new talent, retaining existing employees, and maximizing job satisfaction.
According to a Glassdoor survey, as much as 60% of respondents say that they strongly consider what benefits are offered before accepting a job. Additionally, the Society for Human Resource Management found that 61% of employees say that benefits boost their job satisfaction.
Most job candidates look for benefits, such as health insurance, retirement plans, overtime, and opportunities to grow and receive promotions. Paid time off (PTO) is also a sought-after benefit as it allows for a greater degree of flexibility and allows employees to schedule their leave in a way that best works for them.
Check for Compliance
Once you’ve created your employee pay classification, you or your HR manager must assess the plan to ensure compliance with the various employment laws that relate to your state or location. This includes adhering to policies on minimum wages, overtime payment, equal payment for different sectors of the population, and other laws that govern payment in your area of operation.
You also need to ensure your pay classification includes the necessary allowances for tax and that you factor these into your budget.
Creating the ideal pay classification for your employees attracts the best candidates for your organization, ensures fairness, and helps to prevent the issue of unengaged, unhappy, and unmotivated workers. The most important task is researching market-related salaries and grouping employees into pay bands. Then, all that’s necessary is some simple math and a compliance check.
Once this is done, you’ll have a pay classification for your employees that benefits your business and your workforce.