How to Determine a Competitive Wage
Whether you're just starting a small business or adding staff to a growing enterprise, offering a competitive wage can help ensure that you get well-qualified applicants to help your business succeed. To determine a competitive wage, you must decide what skills and experience will qualify an applicant for the job, and then find the market wage for similar applicants in your industry. All of this is dependent on the minimum requirements of state and federal wage and hour laws, so ensuring compliance with those is a good place to start.
Complying with Wage and Hour Laws
Determine whether you are subject to federal law.Federal wage and hour laws such as the Fair Labor Standards Act (FLSA) don't apply to all small businesses, but you must comply with the law if you engage in interstate commerce.
- Generally, the FLSA applies to any business that has an annual gross volume of business that is at least 0,000, regardless of whether your business is involved in interstate commerce.
- You are involved in interstate commerce if your employees order goods from other states or regularly communicate with customers or clients across state lines. Typically you can assume you're subject to the FLSA if you have a website, since you potentially have customers all over the country.
- Keep in mind that basically every business is considered to be subject to the FLSA. If you use the telephone or mail service, you're usually covered. If you have any doubts, err on the side of caution and assume your business is covered.
- While the FLSA does not require any specific breaks or time off, it does provide minimum wage and overtime standards.
Review the requirements of your state law.Even if you aren't covered by the FLSA, you probably are covered by your state's law, which typically has similar requirements regarding the wages and hours of your employees.
- Keep in mind that federal law sets the floor, not the ceiling. States are free to set higher requirements for wages and hours, and many do.
- For example, if your business is located in California, you must comply with California's wage and hour laws, which go further than the federal laws.
- California requires time-and-a-half pay for any hours over eight worked in a day, and requires you pay double-time for any hours over 12 worked in a day.
- Employees in California also are entitled to a 30-minute meal break off the clock for every five hours they work.
Evaluate minimum wage laws.You have an obligation to pay your employees at least the minimum wage set in the area where you run your business, which may involve federal, state, or even local law. Competitive wages typically are calculated with reference to the minimum wage.
- For example, the minimum wage in California is an hour, which is higher than the federal minimum wage. This means hourly wages for a business located in California may be significantly higher than those in a state such as Alabama, which does not have a higher minimum wage than the federal minimum wage.
- Keep in mind that minimum wage technically applies to your salaried employees as well as your hourly workers. If you're paying someone a salary for a 40-hour workweek, it must equal at least 40 hours at the applicable minimum wage.
- While you may want to keep compensation for entry-level positions as close to the minimum as possible, you're unlikely to get valuable, loyal employees in supervisory positions – even if you're paying them salary – if the compensation isn't much over minimum wage.
- For example, a salaried employee must be paid at least 0 a week under federal minimum wage laws. A salary of 0 a week for a supervisory position with advanced educational or experience requirements typically would not be considered competitive.
Value the benefits you plan to offer.Your compensation of your employees isn't limited to their base salaries or hourly wages, but also includes the monetary amount that other benefits such as health insurance or retirement plans are worth.
- Determine the average cost you are paying for the various benefits offered to all employees, and include these cost amounts in your compensation package so potential employees can understand their total compensation.
- For example, if you are paying 00 a year per employee to enable them to have free parking at the parking garage next door to your office, including this cost in your total compensation package allows potential employees to properly evaluate the wages you offer.
- Basically, when comparing your wages to those of other companies, they would have to add 00, which would be the cost they would be paying for parking on their own if you didn't pay it for them.
- You can also use these valuations to determine what benefits you should add for your employees. To continue with the parking example, most employees would prefer their employer to take care of parking rather than having to go to the time and effort – not to mention the out-of-pocket expense – of making their own arrangements.
- On the other hand, if your business is located in an area with extensive public transportation where most people don't own their own cars, offering to pay for employee parking may be seen as a useless benefit that does nothing to increase the relative base salary or wage.
Evaluating Job Requirements
Determine the job's core responsibilities.To compare the job you're offering to others in the industry, you must determine what aspects of your business an employee in that role will control and where they will fit in the overall hierarchy.
- Most industries use a specific benchmark job description to set average wages in that industry. You often can find these job descriptions in trade publications or on human resources websites.
- You also may want to check job descriptions on the website of the Bureau of Labor Statistics (BLS), which maintains information and data about the U.S. job market.
Set minimum qualifications.For each specific job, you must determine what level of education and experience is required to perform that job effectively, as well as any other skills or certification you want in an employee.
- Be careful not to inflate your minimum qualifications more than absolutely necessary. Keep in mind that the education and experience levels you choose will directly impact the amount of pay necessary to set a competitive wage.
- If you're unsure whether you should require a college degree for a particular job, you might consider talking to a professor at a nearby college or university who teaches in a related field.
- University job banks also can be good places to check if you want to find out the minimum requirements for employers similar to you that are targeting recent college graduates.
- Generally, if you have an entry-level position, you don't want to require experience as a minimum requirement – this will only frustrate entry-level jobseekers.
- If you're just starting your business, this is a trade-off. On the one hand, you may benefit by hiring people who already know the job and can step right in and start working from day one.
- On the other hand, by hiring people who already have experience you run the risk of having to "untrain" habits they may have learned at other companies that don't comport with your practices or overall business philosophy.
Include preferred qualifications.There may be additional skills, degrees, or experience that you don't want to require for a particular position, but that would enable the employee in that position to better perform their duties. Anything you list as a preferred qualification may impact the amount of wages you pay for that position.
- Preferred qualifications differ from minimum qualifications in that you're perfectly willing to consider candidates for a position without these skills.
- Accordingly, the pay rate you set may not necessarily be considered competitive when considering someone who met the minimum and had additional preferred qualifications.
- Setting a range at which you advertise the position, rather than a single amount, can capture those applicants who may have preferred skills that you've determined would be advantageous but are not required for an employee in that position.
- For example, if you are opening a restaurant and are looking for a closing manager, you may list being a licensed bartender as a preferred qualification. Although you already have bartenders, you've determined it would be helpful if the closing manager had the skills and understanding particular to bar operations.
Consider how you'll handle over-qualified applicants.Depending on the job market in your industry and geographic area, you may have applicants who are well over-qualified for the open position. If you want to hire someone who is technically over-qualified, this can affect the wages offered for the job.
- Whether you offer someone a position for which they are technically over-qualified depends on the needs for your business.
- If you anticipate that person could rapidly rise to a higher position in your organization, they may be a good fit.
- However, keep in mind that you may have to pay a little more to get that person into the lesser position, and this may affect what you offer the next person you hire to replace them after they are promoted.
- On the other hand, if your upper-level positions are already set and you don't foresee a vacancy any time in the near future, you may not want to hire someone who is over-qualified. You'll have to pay them more, and they will raise the expected pay rate for that position in your company.
- Aside from that issue, you have to worry about the person becoming bored or dissatisfied and quickly moving to another company as soon as they find something better, essentially putting you back at square one.
Accessing Salary Data
Find average wages in your industry.Once you've determined exactly what your available positions will entail, it's fairly easy work to find out the average compensation offered for a similarly situated employee in your industry.
- You can typically use free resources to find the information you need, such as by checking websites, including the BLS, that compile pay scale data for different types of jobs.
- However, keep in mind that if your business falls into a relatively narrow niche, you may have difficulty finding data that corresponds directly to the positions you want to fill.
- You also can work with an agency that specializes in this area to find the applicable average wages and help you develop a competitive compensation plan. Typically, though, these services are going to cost more than the average small business would need to spend.
Consider the appropriate geographic area.Unless you're planning on hiring nationally from a national pool of applicants, the average national wages in your industry won't necessarily control whether your wage is competitive.
- For example, if you're hiring for a brick-and-mortar location, such as a retail store or restaurant, a competitive wage would be defined by comparing wages offered at comparable locations nearby.
- If you're starting a website or other service where you anticipate national business and the location of your employees is more fluid, you typically would want to look at national statistics. You always have the ability to adjust the pay rate based on the employee's location.
- Not only do state minimum wage laws and the prevalence of unions play a role in setting competitive wages in your area, but the cost of living also is a factor.
- For example, given the cost of living in San Francisco, you typically would have to offer higher wages there to remain competitive than you would if you were located elsewhere in the bay area.
Interpret data in context.Not only is your general industry and your geographic location important, but you also must consider the size of your business, your growth projections, and what you'll need from the employees you plan to hire.
- If you have a small business that's just starting out, you're going to offer less than a large, established corporation in the same industry – and jobseekers understand that.
- To successfully compete with those large corporations, you need to think in terms of value added. Look at the organizational structure and employee mobility to determine what incentives you can offer employees to get and keep them.
- While you may not be able to offer an equivalent base salary, look at options you can offer in terms of flex time, the ability to work from home, or other intangible benefits you can provide that would sweeten the pot without breaking the bank.
Leave room for adjustments.Typically the best-qualified applicants will want to negotiate a better compensation package, so once you've determined what you plan to make as an initial offer you should leave room in your budget so you can increase the chances you'll be able to attract the best person for the job.
- Usually you'll find you get a better response when you advertise a range of compensation rather than a flat dollar amount. Setting a range provides you with more flexibility in the event you find a promising candidate.
- You also want to leave room in your budget to reward strong, productive employees with bonuses or other incentives, as well as provide regular pay raises to keep pace with inflation and the cost of living.
- Keep in mind that attracting new employees with a competitive compensation package is only one part of the equation. If you want those employees to stay with your company, you want to be able provide pay increases that recognize their contributions to the business.
Video: How to Use Compensation Surveys for Competitive Pay and Benefits
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