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If your small business is about to begin to hire its first employees, you may be puzzled about how much to pay them. If you offer too little, you won’t be able to hire who you want, but if you offer too much, you may find yourself trapped in an unsustainable pay scheme.

There are really two goals in creating a compensation structure. The first is to attract and keep high performers by offering to pay enough. The second is to motivate them to do even better by offering to pay them more. That’s why you need a plan that anticipates growth, even before you hire the first employee.

Three Steps to Setting a Salary

Step One:  Draft a Job Description

Setting the right salary for any employee requires that you define the job carefully.  A job description is the most basic human resources tool, useful for interviewing and then providing feedback to the employee. It can also protect an employer from charges of unlawful discrimination if it becomes necessary to terminate the employee. More to the present point, however, it provides a basis for comparison with what other employers in your industry and geographic region pay for the same function.

A very basic question, at the outset, is whether this job, as envisioned, is managerial, administrative or highly skilled.  If so, that employee will likely be exempt from the provisions of the Fair Labor Standards Act.  If not, consider that you may be required to pay overtime.

Step Two:  Do Some Research

A huge number of online research tools exist, including PayScale, Salary.com and America’s Career InfoNet.  Remember, however, to look at function rather than title. A sales associate in one industry may do something vastly different than a sales associate in another, and pay scales in Montana are different than those in Los Angeles.

Step Three:  Set a Range

On the basis of this research, you can set a salary range.  Many advisers suggest setting the ceiling before setting the floor.  It is generally better to hire somewhere in the middle, so that you have room to reward the employee for good performance.

Step Four:  Reality Check

If you cannot pay within a realistic localized range, then you may have to redesign the job or consider whether you would be better off with a temporary or part time employee or an independent contractor. It is probably best to avoid the temptation to advertise and pay for a job at a lower skill level, while requiring performance at a higher level. Employees are savvy about this, and will jump ship at the first available opportunity.

It is also wise to consider the history of a particular candidate. If you want to hire in an independent contractor who you already work with, remember that the contractor will probably not be interested in a pay cut.

Designing a Compensation Structure

Here is where the interesting work of creating a company culture and growing your business begins. The design that motivates employees in one industry will not necessarily work in another.  Here are three big questions to consider.

Is sales a part of the job?

If so, you may want to consider a mix of base salary and commission.  The balance may depend on how much time will be spent in non-sales activity, whether sales will require a long process of negotiation and relationship building and whether it will be a team or an individual effort.  Do you want to add company-wide bonuses and/or profit sharing when sales reach a certain level?

Do you want to create a “flat,” relatively egalitarian company culture, or is your style more hierarchical?

The former suggests only a modest difference in salaries throughout the business or segments of the business, but it may not allow much latitude to recognize outstanding performance, except through bonuses, which can work against an egalitarian company culture.

The latter may seem more bureaucratic and set a less collaborative tone, but may also set out a predictable path for an individual employee’s expectations about growth and promotion.

It is also important to consider the demographic from which you want to hire and whether it is reasonable to expect a long-term employment relationship.  New hires right out of college are more mobile than people who own houses.  A culture that works well when the business is still small, may not work well as it grows.

What about employee benefits?

Before you begin to hire, make sure that you consult with your business attorney about state-mandated employee benefits.  Recent changes in California and New York City requiring paid sick-leave, for example, may be quite significant.

Under the Affordable Care Act, if your business will have fewer than 100 full-time employees or full-time employee equivalents in 2015, it need not offer health insurance. However, that threshold is set to drop to 50 employees in 2016.  If the business is very small, it may be eligible for a tax credit if it buys employee health insurance through the Small Business Health Option Program (SHOP).

Very small businesses, including those contemplating hiring for the first time, typically do not provide employee benefits because of the cost and administrative burden. Nonetheless, health insurance, in particular can be a powerful advantage in a competitive hiring situation.

Other benefits, such as flexible hours, may cost less, but may also provide less of a boost. The best way to know about what benefits might be important to potential employees, of course, is to ask them. It can be dangerous to rely on surveys about what women or millennials want.  Offering to pay to freeze a female employee’s eggs may backfire.

Hiring employees is a big step for any small business. It is a good indication of some success and an early step toward scaling.  As with all important steps, however, it should be part of a plan built on sound research and an eye on the future.

 

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