All your hard work has paid off. Your small business is a success. You’re in the black. You’re email inbox is full and your phone is ringing. You’ve got so much work that you’re now ready to hire your first employee. According to The Hartford’s 2014 Small Business Success Study, that’s not something a lot of small biz owners are doing. With that big decision now comes a big question: how much do you pay them? While some have said that “setting salaries is an art, not a science,” there are still some basic things to keep in mind to guide your thinking. Here are five of them.
1. Research What Similar Positions Pay
Chances are the position your new employee is about to fill isn’t the first of its kind. That means you can easily research what other companies—big or small—have decided to pay workers just like the one you’re about to hire. Sites like PayScale.com, Salary.com or The Bureau of Labor Statistics are very useful resources to give you a general idea of the pay ranges for certain positions. You can also get in touch with employment agencies or local business associations. Susan Solovic, small business expert and author of It’s Your Biz, especially recommends talking to other business owners.
“There’s nothing wrong with asking others in your field, ‘If you had a job at this level, with these responsibilities, what would you pay?’ You can get a pretty good sense that way.” If you do all of that, you should get a really good starting point for a potential salary.
2. Factor in Cost of Living and the Market
Every state, city or town has a different economic reality. The cost of living in New York City, New York will be vastly different than the one in Altoona, Iowa. “The wages that exist in a given labor market are partly a function of what it costs to live there,” says Eric Tyson, author of Small Business for Dummies. So, when figuring out what to pay your employees, you have to bear in mind what expenses – like rent and taxes – they face in your area. On a similar note, you should also find out what other businesses in your local market pay for the position you’re hiring for. Partly as a good frame of reference, but also because, “At the end of the day, you have to offer a competitive package that’s comparable to what other similar employers in your area are offering,” says Tyson. In other words? You want the salary you offer to be competitive and help your workers afford their basic day-to-day costs.
3. Budget Ahead
Don’t just pick a number that works for you now. Remember that in a year or two, there’s a good chance that a raise may be in the cards. You need to be prepared for that. When figuring out an employee’s starting salary, make sure it’s one you can still comfortably afford in the coming years when it might go up.
4. Set a Salary Range
You’ve no doubt noticed many job postings list a salary range, not a set number. You want to do that for yourself before even posting a job. Why? You never know what kind of candidates you’ll get. Some might be good, not great. That’s when the lower end of the range comes in handy. But what if you find an amazing candidate who you know will help generate above-and-beyond business for you? Then you can offer the higher salary to pay for higher quality work. You always want to be prepared for all contingencies.
5. Calculate What Money the Employee Will Save or Generate
A good approach to figuring out how much to pay is to grab your calculator and look at what the job you’re hiring for means for your business in dollars and cents. For example, how much money would this new employee help generate? Solovic suggests asking yourself, “What is the return on my investment I can expect?” When you have that number, set their income in that ballpark so that their salary effectively pays for itself. Now, if the employee’s duties aren’t as directly involved in generating revenue (e.g., it’s an administrative role), then you can still calculate how much money they would save you in time, stress, and work, and then use that to ballpark a salary. If you can come up with a statement like – as Solovic offers – “If I didn’t have to spend 20 hours of week doing X-Y-Z, I could bring in 50% more business,” then you have a good number to work with.
In the end, settling on the right amount to pay your new employee comes down to what you’re most comfortable with. These tips should help put you on the path to finding that perfect number you—and your employees—can be happy with. Most of all, Solovic stresses, “It’s important not to be afraid to invest and pay a salary that ensures you’re going to attract the best employee for the job.”
Next Steps: Are you looking to manage your employees more effectively but don’t have time to keep up with the latest research and trends in talent management? We’ve got you covered with the weekly Small Biz Ahead Newsletter. Sign up today and start receiving the weekly newsletter chock full of the latest tools and resources to help you run a successful business.