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Five-minute money masterclass: how to set a sensible salary

Written by Ryan McChrystal on Thursday, 12 March 2015. Posted in Finance

Employees needn't be the first victim of budgetary constraints

Five-minute money masterclass: how to set a sensible salary

One topic that will always garner interest is how much you pay an employee. It can be difficult to determine if you’ve never done it before but sometimes even the pros get it wrong. The general rule is to pay enough to get the most out of your workers and attract the best talent but not so much as to overpay and leave yourself unnecessarily out of pocket. If this sounds a little tricky, fear not, for we have experts at hand to show that determining how much to pay staff needn’t feel like applied mathematics.

Stick to the law, or else…

It should go without saying but following the news recently that 162 employers failed to pay the minimum wage, it would seem some people still don’t get that sticking to the law is a must. “An employee’s right to be paid fairly is one of the most fundamental aspects of the employment relationship,” says Richard Smith, head of employment law at Croner. “At the very least there are statutory obligations that will need to be met, namely the National Minimum Wage Act 1998, which creates a minimum wage across the United Kingdom, and the Equality Act 2010, which requires employers to pay men and women equally for equal work.” The current minimum wage rates are available from the UK government website.

Not only can failing to adhere to the law land you in trouble but research by the Department for Business, Innovation and Skills (BIS) reveals that businesses who pay less than the minimum wage risk huge damage to their business through loss of reputation, low productivity and higher staff turnover.

Make workers happy

They say money can’t buy happiness but is this always true? As it turns out, you can strike a balance with pay to ensure you keep employees happy while still getting the most out of them. Nic Marks, director at Happiness Works, a company that focuses on science-based, responsive analytics to kickstart new ways to happiness and productivity within the workplace, says: “Too little pay can induce feelings of hostility, while overcompensation not only increases costs to businesses but, contrary to popular belief, can reduce motivation.”

“A subjective sense of relative pay is far more important than absolute wage,” says Marks. “When employees feel they are paid more than others in similar roles they experience higher job satisfaction, suggesting that a sense of recognition is more important that spending power.” But be careful. Higher wages do not always result in happiness. “The highest paid tend to have the most job-related anxiety. Paying people too much can also reduce their motivation, a phenomenon known as the ‘over-justification effect’.”

Keep it transparent

In the pre-internet era, when employers had access to payroll data and surveys and employees didn’t, it was easier to keep them in the dark about pay. In this age of ubiquitous information, companies increasingly realise it is unwise to blur the picture and still expect energy, output and loyalty from staff. Thomas Drewry, co-founder of Emolument.com, a salary benchmarking site, says: “Enhancing salary transparency reclaims hours spent browsing job boards and forums, and chatting to headhunters and colleagues trying to extract information, allowing everyone to focus instead on being productive in the job itself.” 

Salary transparency can also pre-empt frustration, confrontational conversations and mistrust among colleagues, which often plays a big role in individuals wanting to move on. “Crucially, transparency shows a level of trust which helps retain staff by making them feel valued and respected through an open dialogue when it comes to pay,” says Drewry. To begin a policy of transparency, it would be useful to let staff know where they are headed. “Give them a good sense of the salary they can expect in two and five years’ time, with variables such as personal and business performance, and you will remove a great deal of uncertainty.” 

Track the competition

It’s vital to know who your competitors are and to identify the key players – after all, having effective and up-to-date business intelligence is critical. “Search job websites such as Monster, Indeed and Total Jobs as well as local recruitment agencies to see what the competition is offering. Find out what jobs they are currently recruiting for – this will give you an indication of how they are performing and if they are expanding,” says Leigh Freeman, senior HR consultant employers’ organisation, EEF.

As an employer you are not the only one comparing salaries with competitors – your employees will be doing it too. If you don’t want to lose good employees it’s important to keep doing your homework. “Networking is another great way to meet employees from other organisations and to gather intelligence about the different offerings on the market,” Freeman adds.

Review your pay scheme

Once you have an established pay scheme in place, it follows that you should regularly review it. According to Freeman, this allows you firstly to remain legally compliant. “Do you pay the national minimum wage? Employees have a right to challenge employers if they think they are experiencing pay discrimination, so you must also ask yourself: am I paying the same rate to men and women doing the same or comparable jobs?”

Over time, employees’ job roles also tend to change and evolve, so you must ensure their pay is reflective of the job they are doing today and to what you would be advertising if recruiting for the role externally. “Aligning pay to reflect the skills required to do a job is key to managing a fair and compliant organisation therefore a job evaluation exercise will be necessary,” says Freeman. “A pay review also helps identify pay schemes that are no longer fit-for-purpose and where you can make possible savings and efficiencies and, if you are an organisation with a history of acquisitions or mergers, you may have inherited employees on different rates of pay who could be doing a comparable job.” 

About the Author

Ryan McChrystal

Ryan McChrystal

In a previous life McChrystal wrote about asset management in the Middle East. A history and politics graduate from the north of Ireland, he now focuses his efforts a little closer to home. 

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