Attracting and retaining talented employees is vital to the success of any business, and offering competitive compensation is one of the most important things that you can do as an employer to make your business attractive to the best and brightest.

But what exactly is a competitive salary for your industry and your geographic area? Following these six steps will show you how to pay employees, help you put together the best pay scale system, and ensure that you’re paying employees fairly.

1. Create Written Job Descriptions

Before you even begin thinking about numbers, you should be thinking about people. What roles do you need to fill as an employer to ensure your business can operate on a day-to-day basis? Compile a list of job titles from entry-level through management and for full-time employees as well as part-time employees. At this early stage, you shouldn’t limit your thinking based on what you can afford. Instead, plan your ideal team so you can ensure you’re covering all the bases. Once this best-case scenario is in place, you can then take action in a way that’s financially feasible.

Once you’ve compiled a list of all the employee, as the employer, you will need, create thorough descriptions for each job. The job descriptions should outline what tasks the person is responsible for, who oversees the person in the position, what hours are required, who works directly with the person in the role and what qualifications are mandatory and desired for the post. Make these job descriptions your ideal vision of the job. What types of experience, training, skills, and education would the perfect person possess?

2. Do Some Research

Once you have clear descriptions for every job in your business, you can begin researching what other businesses in your industry are paying for those types of roles. The three best ways to research salaries include:

Expert Sources

To start, we recommend leveraging the information you can find on government websites. It tends to be the most reliable and is a great starting point for further analysis. For example, the U.S. Bureau of Labor Statistics provides highly detailed annual salary and hourly wage information for all types of jobs and industries both nationwide and in key metropolitan areas.

The Department of Labor for your state should also offer occupational wage statistics for metropolitan and rural areas. In many cases, this information is even more relevant as salaries, minimum wage, and cost of living tend to be highly localized. For example, a business based in New York City is going to need to pay its employees a higher salary or hourly wage than a business based in a more rural area, because the cost of living is higher, as is the minimum wage mandated by law.

Want Ads & Employment Sites

Reading print want ads and checking out job postings on employment sites will give you a feel for what your competitors are offering the same types of employees that you’re targeting. These can be particularly helpful if you operate in a competitive industry, or are in a location with a limited talent pool. Competition can be fierce, so understanding what other employers in your area are offering can give you the insight you need to put together a better compensation package.

Non-Government Websites

Websites for professional associations, newspapers, and magazines and reference sites may also provide insight into the going salaries for various jobs. There are also businesses like PayScale that specialize in compiling salary data across industries and regions, and then make that available to both workers and employers.

3. Decide on the Type of Pay

For each position, you’ll need to decide whether employees should be offered hourly wages or an annual salary. Typically, in jobs where the time that an employee spends on-site is vital to the success of the business, they should be paid hourly wages.
For example, you need enough servers present at any given time to serve customers or an administrative assistant on-site during crucial business hours to handle tasks for your business.

On the other hand, employees whose knowledge and skills are vital to the role, requiring specialized training and education, are often paid an annual salary. Examples include managers and professionals like accountants and lawyers. Remember that sales commissions, tips, overtime pay, and bonuses can also play a role in a worker’s compensation and be used to reward top performance.

You might also decide to work with an independent contractor or freelancer for some roles. These types of workers are typically paid as hourly employees but tend to command a higher hourly rate. That’s because unlike salaried employees (and salaried employees if you’re generous), these workers don’t receive any benefits like health insurance from your business. They’re responsible for providing their own, and so their hourly rate usually has a fee for this, as well as other responsibilities like a self-employment tax, baked into it.

4. Establish a Budget

If you don’t already have a portion of your operating budget set aside for payroll, you’ll need to do that before you begin creating scales. When establishing a payroll budget, it’s critical that you take the time to understand your current finances, as well as your projections for growth. This can help you determine the precise amount that you need to set aside for payroll. As a ballpark, most experts recommend that somewhere between 18 to 52 percent of your operating budget be devoted to salaries.

This might seem obvious, but another vital part of planning your budget, is making sure that you can consistently meet payroll. When you’re just starting your business, it’s pretty standard for the founder(s) to not take a salary until the business breaks even or becomes profitable. The same can’t be said for any employees you might need to get your business off the ground.

In early-stage technology startups it might be common for the founding employees to work for equity, but in the world of retail and foodservice, that isn’t common. There’s no excuse for missing payroll, or attempting to compensate your employees with something other than money. Your employees deserve to be compensated fairly, and on time, for the hours they work, so don’t miss payroll. It can severely damage your reputation, making it hard to hire new staff, get a loan, or find prospective business partners in the future.

SEE ALSO: No Pressure Small Business Budgeting Tips

5. Create a Scale

Using the research that you’ve gathered, create a minimum and maximum annual salary or hourly rate for each position. Don’t think about your budget the first time that you create your scales. Use the information that you gathered and create an ideal scale. Then, go back, add up the total cost of what you’d be paying out if the wage and hours worked from all employees was at the top of your scale.

If this seems unrealistic for your business based on the budget you’ve already created, then you’ll need to go back and readjust. This step can be time-consuming. You may need to adjust and readjust several times, but it’s better to put in the work now then wait until later and find yourself in a situation with employees to pay and no money to do it with.

When creating your pay scale, you’ll want to think beyond the salary, wage, and hours worked. For example, you might also want to factor in benefits like health insurance, paid time off (PTO), and overtime pay into the rate or salary you offer each employee. To be competitive with other employers in your area, you’ll also want to ensure that the compensation you provide each pay period is high enough after deductions like social security, federal income tax withholding, workers’ compensation, and any other taxes or fees your employees are required to pay by law.

6. Evaluate Candidates

Once your pay scales are complete, you’re ready to begin evaluating actual employees to set fair compensation. Use your job description as a guide. How well does the person match up to your ideal vision of who would work in a particular job? If they are exactly what you had hoped for, position their wage higher on the scale. A person who has about half of what you’re envisioning should fall part way on the scale, while someone who is less of an ideal match would be toward the bottom.

Once you have your salaries determined, you’ll need to revisit them annually to ensure that you provide fair pay increases to reward performance and keep up with the rate of inflation. Don’t view employee compensation as something set in stone. Remaining flexible and adjusting as needed will help you retain your top employees and continue to attract talented

We hope that this short guide on how to pay your employees helps you get over any fears, doubts, or questions you might have about paying your employees. We’ll be back at some point in the future with a post that dives deeper into the more complicated aspects of the issue by helping your business understand things like payroll taxes, payroll record retainment fair labor standards, and anything else you might want to know about paying employees. Have a specific question you want us to answer? Let us know if the comments!

SEE ALSO: Hiring an Employee Checklist: Everything You Need to Know

Ryan Gilmore is a writer at ShopKeep.

Ryan Gilmore

As Inbound Content Marketing Manager at ShopKeep, the #1-rated iPad Point of Sale System, Ryan Gilmore uses his extensive experience in small business technology to create educational content that helps merchants run and grow their businesses more effectively.