Bringing on a new staffer – and figuring out how to keep good employees happy – depends so much on what you’re willing to pay them. But how can you know whether you’re offering them too much or too little? Here are some expert tips for properly gauging compensation for employees.
Learn the Going Rates
Mike Emoff, CEO of Ohio-based distributor Shumsky (asi/326300), thinks a little market research can give you great insight in determining what to pay staffers. Smart executives, for example, take advantage of websites like payscale.com that offer frequently updated salary data.
“A lot of times you’ll hire somebody on their personality – which is important, especially in a small operation – but then once you find somebody and you look at their history, you can start to compare certain costs in the marketplace with the same position,” he says.
According to Wayne Cascio, Ph.D., a noted University of Colorado professor, most states’ labor departments also have a lot of compensation information available for free. “The main thing is you don’t want to overpay because then you’re not competitive, but you don’t want to underpay because you won’t be able to hire anybody,” he says. “So, to get an idea of what going rates of pay are for various jobs, you really need to look at pay surveys.”
Business owners have three real choices: Lead the market on pay, match the market on pay or lag behind. “Most small-business owners are, at best, going to match the market, and most likely they’re going to lag the market,” Cascio says.
Emoff thinks a way to justify a lower-than-average salary to a potential employee is to hire someone with lower-than-average experience. “You want to be competitive so that they come to work for you, but it’s beneficial if you’re fortunate enough to find someone who’s got a really good skillset,” he says. “Maybe they just haven’t developed it yet – like in the case of someone just coming out of college.”
Weigh Full-Time vs. Part-Time
Experts like Cascio believe there are definite pros and cons to bringing someone on full-time rather than part-time. “The two models are to hire part-timers – sometimes they come in at a higher rate of pay but they don’t get any benefits – or to hire full-time people and then pay them overtime rather than add an additional part-timer,” he says.
While not having to provide medical, dental and other benefits to part-timers is an obvious financial advantage for many small-to-mid-sized business owners, it may limit the amount of prospective employees interested in working for them. “That’s the big drawback for employees, as the benefits are what people want,” Cascio says.
Emoff agrees that business owners may need to offer part-time employees better pay than they would full-time workers, which could be a disadvantage in the long term. “If you hire somebody half-time, sometimes you need to pay them a little more,” he says, “and if they eventually work full-time and you’re paying them more, then they have that and benefits, and then you’re stuck.”
But for business owners with few employees, Emoff does think it can be wise to hire someone part-time. In this scenario, companies gain flexibility with minimal commitment.
“You can hire part-time people and you can let them go if the activities don’t turn into real business,” he says. Here, you have the option to work staffers at the same time during busy periods, and give them time off when things are slow. “You just manage your workflow a little better without having the risk,” Emoff says.
For startup or struggling companies that need additional manpower, profit-sharing could be a viable alternative. Business owners can provide a lower-than-average wage, supplemented by a small percentage of the equity within the company.
“Much is going to depend on how much you can afford, but the trend today is more toward variable pay than fixed pay,” Cascio says. “Variable pay changes with some measure of the performance of the company or productivity, like profit-sharing, for example.”
While it’s a hugely successful company today, Google actually employed profit-sharing for years, never leading the market in pay. “You’re probably not going to do that for a low-level administrative person, but certainly if you need technical talent or professional-level talent, that’s what you can do,” Cascio says.
If you’re looking to hire a salesperson, Cascio contends profit-sharing is a decent option compared to paying reps by commission. “The advantage of that is you don’t have to deal with high-pressure sales as a customer. You don’t walk in and get accosted by three people – there’s no incentive to do that,” he says. “So much of it depends on the product you’re selling and the organizational culture you want to create.”
Push Bonuses Over Raises
Cascio says most employers provide pay raises for employees an average of once per year. “It can be done either on the anniversary date of an employee’s hire or it can be done at a certain time of year, depending on the fiscal year the company is operating under,” he says.
But Emoff says giving employees a one-time bonus rather than a permanent increase in pay may be a more sound financial strategy. “You’re committed to an escalated salary obligation with a pay increase, which makes it really hard to start to realize that you’re overpaying,” he says. “You can control it with bonuses. I would say in the small-business environment, you know what you need so you’re not making commitments to perhaps overpay or overcommit yourself.”
Indeed, a one-time bonus keeps business owners from locking themselves into longer-term pay increases that may prove unaffordable – something that’s known as the “annuity problem,” according to Cascio. “If you give people permanent raises over time, those things compound, and you’re really paying people for the good performance they had in the past. Bonuses are much more related to, ‘What have you done for me lately?’” he says.
With bonuses, if you don’t have any profits, you’re not locked into dispersing money to employees. “More and more companies are tying at least some portion of pay to a bonus, which is considered variable pay, and it depends on the year that you had as a company and also as an employee,” Cascio says.
It turns out there’s a tax advantage to providing year-end bonuses, as well. “You bonus the employee and you’re not paying taxes on it. It’s a pre-tax payment,” Emoff says.
– Shane Dale is an AZ-based freelance writer.