Setting Compensation for Newly Hired Employees

Felicia Sullivan, Anne Shaw

For a small business owner, every new employee hire is a critical investment. After considering all your options, including virtual assistants and freelancers, you’ve decided you need to hire a new employee. Your next step is to determine whether you need someone seasonally, part-time or full-time, and whether you should hire an employee or a contractor. Check out our ultimate guide to hiring new employees for your small business for a comprehensive checklist on acquiring new talent.

Once you’ve found your new hire and are ready to seal the deal, the question surfaces: How much should I pay my new employee? Getting to that magic number is a delicate dance between understanding market rates, the employee’s potential value, what you can afford, and their motivation for joining your company.

Searching for and interviewing candidates only to find someone you desperately want to hire… but can’t afford can be a heartbreaking waste of time. And despite the growing importance of benefits, special perks and work-life balance, compensation is often still the determining factor in whether your preferred candidate will accept your job offer.

Your pay calculation can make the difference between settling on a fair wage to attract top talent and breaking the bank. Here are six simple steps to determine that magic number.

Step 1: Determine Your Cost

Time to get out your accounting books and your favorite calculator. Got them? Good. Now, let’s walk through the steps:

  1. Understand employee-related costs beyond salary. For instance, will you need to rent a larger office space or buy equipment and furniture to accommodate your new team member? Do you plan to offer your employee any additional perks and benefits, like health insurance or weekly happy hours? Finally, don’t forget to factor in payroll taxes or recruitment and training costs.
  2. Consider how these costs fit into your current budget. Look at your planned budget, your revenue trends over the past few months, and your 12-month projections. Identify where there’s room – and how much there is – to cover employee-related costs. Factor in both the size and the timing of any significant business increases (or slow periods) you’re expecting.
  3. Evaluate your profit margin. How much of your revenue do you actually get to keep? Once you’ve pinpointed this number, you’ll have a better understanding of whether your business can support additional staff while still allowing for a buffer in case of emergencies.

 

Step 2: Determine the New Employee’s Potential Value

You can work with your accountant to estimate your potential employee’s direct and indirect value. How much revenue will they bring to your business (direct value)? One strategy is to focus your early hiring on roles that will generate sales. Factor in how much revenue you expect your new employee to bring in during their first three months on the job, their first year on the job, and an average thereafter.

Alternatively, there are times when it makes sense to hire for efficiency (indirect value). If, for instance, you’re losing customers because you’re stretched too thin and can’t provide the expected level of service, then hiring someone to take on customer service may be the answer to maintaining your current revenue flow. Train them well, and they could even up-sell current customers and win over more word-of-mouth referrals.

And if you want to keep customer service with you for now, then consider hiring an administrative assistant who can take some of the load off your back, saving you time so you can better focus on sales and improving your service to current customers.

You’ll also have a gut-check sense of their value by speaking with their former employer and evaluating their references. Evaluating their worth from the onset will reap growth rewards in the long term. Here are some questions to ask their references to assess if you’ve hit the hiring jackpot:

  1. Did they take initiative? Did the employee bring proactive ideas or creative solutions to problems that saved their former employer time, resources, or money? This kind of employee will bring more long-term value to your business because they have a track record of investing in their employer’s success rather than going through the motions of their day.
  2. Did they bring emotional baggage? Some star employees don’t make the grade because the emotional expenses they bring to a business can far exceed the benefits. Anything that inhibits your employees’ morale or productivity can cost you big, so ask about emotional costs during the reference check process.
  3. Were they self-starters who weren’t afraid to make decisions? One mark of a successful small business is evaluating when, and to whom, to delegate tasks. Was this employee a high-flyer — someone who was able to assess daily challenges and resolve them quickly and efficiently without having to get their employer involved? Did the employee know when to escalate issues? This allows you to evaluate the time you’ll be saving managing the daily grind.
  4. Were they loyal? Was this employee committed to the company? Did the employee share and promote the company’s values? Loyal employees are more invested in the success of your business, and will contribute to the success of it.

 

Step 3: Understand Their Why

During the interview process, assess why your prospective employee wants to work for you, why they left their previous job, and what they’re looking for in their next role.

You might be chatting with a parent who wants flexible hours so they can manage their work and family obligations. Or you might be negotiating with a young millennial who wants to be sure their input and ideas will be heard.

By taking the time to learn about the individual’s motivations and goals, you’ll be better prepared to design a compensation package that fits them.

 

Step 4: Determine A Salary Range

When hiring it’s helpful to have a salary range in mind depending on the person – their skills, background and the depth of their experience – to whom you end up making an offer. Ask yourself these questions:

  1. What salary can I very comfortably afford? This will be the low end of your range. Use it for candidates who meet your minimum requirements but will need a bit more attention and grooming if you hire them. Keep in mind that hiring someone at the low end of your range allows for a cushion to give them raises as they grow.
  2. What is the highest salary I can offer and what would I need from someone to make it worth paying this much? This will serve as the top of your range. Anyone receiving your top offer should check off every box in terms of what you need and should hit the ground running with minimum guidance and little need for additional training. Keep in mind, what this type of person is typically paid in the market you’re in and what they’re worth to your business.
  3. What’s the going rate for my new employee? You don’t have to be a CIA operative to calculate the right salary for your prospective hire, but you do need to do some smart sleuthing. Chances are your prospective hire has already researched what their compensation package could be, so it’s important that you be one step ahead. Getting competitive compensation right is essential. Here are some resources:
    • Salary.com has a treasure trove of real-time pay insights from their annual salary surveys and HR-reported data, which allows you access to how much employees in similar companies are earning nationally, as well as on a regional level. Their CompAnalyst tool for small businesses also helps you determine merit raises and bonuses once your new employee is on board, as well as equitable pay across your employee pool. The CompAnalyst tool is a paid service, the fees for which range on a sliding scale based on your business needs and the size of your company. However, if you’re not ready to make the investment, you can use their salary calculator search tool for individuals as a clever workaround. For example, a Barber in Grand Rapids, Michigan, makes an average income of $29,836.
    • Payscale.com offers a similar service; however, their individual pay reports are comprehensive. As a small business owner, you can insert details about your prospective employee — including years of experience, education, and location — to determine their wage worth. For example, a Retail Associate with five years’ experience in New York City earns, on average, $41,450.
    • Glassdoor.com is a free service where you can make annual income calculations, and you can also check out honest, anonymous reviews of your competitors. Glassdoor is the place where employees gripe about salary, working conditions, and overall company morale, so it also gives you good intel to help avoid the mistakes other small business owners are making.
    • Private Facebook groups populated by small business owners, and subgroups (based on business type), are a safe haven for owners to compare notes on everything from employee salaries to marketing and industry trends. There are thousands of groups online — all you need to do is use the search bar on your Facebook page to find what you’re looking for. For example, a search for café owners resulted in dozens of pages dedicated to cafés and restaurants. Owners join groups to collaborate, not compete, so you’ll be able to get real information from your peers about salaries and hiring for your small business.
    • Poll local staffing agencies, temp agencies, and recruiters to see what other people who have similar roles are making. You can find local agencies through a quick Google search.
    • Review local job boards and sites for matching job descriptions. This will help you see what other businesses are offering and the skills they require for the roles for which they’re hiring.
    • Research local employment laws to ensure compliance with pay, vacation, and any minimum wage obligations, including frequency and method of payment.

 

Step 5: Be realistic about what you can afford.

Now that you have a clear understanding of your budget and salary benchmark data, you can use it to determine the salary range for your candidate. Knowing where these two ranges overlap will help you find the sweet spot in terms of the type of person to recruit.

Let’s say that your salary range for a customer service rep is $30,000-$45,000, and the benchmark range for your market is $37,000-$47,000. You’ll notice that the bottom of your market’s salary range falls around the center of your range, so you may want to recruit someone early in their career who shows high potential and enthusiasm for your business. But what if your range doesn’t quite reach even the bottom of the average range in your market? There are quite a few strategies to consider next.

Option 1: Hire a remote employee. Look into other markets with lower costs of living and less competition for candidates, then recruit employees there, advertising that it’s a remote opportunity. That additional perk, alone, may make it easier to find someone great whom you can afford to hire. Just make sure you have a solid communication plan and the right technology in place to manage someone remotely.

Option 2: Offer deferred compensation. With this option, you’re promising your new hire to pay them more at a certain time in the future, usually when they’ve met a specific professional goal or when the company achieves a specific revenue target. If you choose this option, strongly consider asking an attorney to help you draw up the offer letter and employment agreement.

Option 3: Offer equity. Simple. Many start-up employees are more comfortable accepting lower salaries if they’re promised some equity. Be sure you carefully do your math to match their personal impact to what they’ll get as your company grows.

Option 4: Offer an attractive full compensation package. (including salary, bonus, benefits, and vacation/sick/parental leave). What aspects of your package matter most to your prospective employee, based on the reason they want to work for you? You can level up and down aspects of the package to customize it to their needs, while keeping it friendly to your bottom line.

Option 5: Offer perks instead of a higher salary. Can you be flexible with hours, telecommuting, or casual attire? Evaluate the perks you’re able to offer, based on your business, and shape them as part of the attraction package.

Option 6: Hire interns. Interns are paid less than professionals and hiring great ones can be an effective strategy for new businesses, especially if someone with lower level skills could help save you time.

Option 7: Hire someone who wants a career transition. You may be able to afford a more seasoned professional who has the right soft skills to transition into the role you need, but who doesn’t have a lot of experience in your industry or in the type of job for which you’re hiring. Offer to groom them and give them their first shot to make an effective career move.

The right package is a mix of salary plus the perks and benefits that contribute to making them a valuable employee. Understanding your prospective employee’s why, coupled with their level of experience, will help you determine the right option.

 

Step 6: Make Them Part of the Process

Often, potential hires feel they don’t get a say in their compensation process — only a means to accept or reject an offer and perhaps an opportunity to negotiate on salary or hourly rate. Present the full package and allow them to evaluate what’s most important to them, so you can customize it further to be attractive and competitive.

Determining how much to pay represents the first collaboration between you and your new employee. Do the research legwork and then make the negotiation a conversation, so that both parties are satisfied with the end result.

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