How to Set Salaries

depositphotos_42288161_s-2015Stever Robbins penned an excellent article for Entrepreneur outlining these tips for setting fair and equitable salaries that won’t break the bank. We think it’s worth a read. When finished, check out PNP’s 2016-2017 NONPROFIT SALARIES, STAFFING & TRENDS REPORT to review nonprofit salaries for 42 positions across five different organizational budget sizes.

Setting salaries for your staff is always a tricky thing to do, especially hard if you’ve never done it before. On one hand, you want to pay enough to get the best possible talent. On the other hand, you don’t want to overpay. What are you to do?

First of all, don’t panic. Remember that your goal is to attract good talent and pay them fairly. When it comes to the exact amounts you should pay, however, know this: You never want to pay more than the job is worth to you. That’s just good business. Because at the end of the day, a salary is like any business expense—it’s an investment, and you should get a return. So you start by deciding the top amount you’d be willing to pay.

The best way to determine that ceiling is to ask yourself this: How much more valuable will this person make the company? Your answer is the most you’d be willing to pay that person when it comes to their salary.

For a salesperson or business development employee, that question is easy to answer. These types of employees bring in revenue, so you can just ask yourself if the sales they’re generating covers their salary. If your new candidate can bring in $500,000 in profits, then it might certainly be worth it to offer a $200,000 salary to bring them on board.

But how do you decide what you’ll pay for administrative and support staff? The ones who don’t bring in money but whom you couldn’t live without? Their value isn’t so much in the money they make but in the money they save. So ask yourself what it would cost not to have them on board, and use the answer to justify their salary.

Consider your IT person, for instance. If you had to configure your own Windows network, how much time, effort and money would that cost you? Be sure to add in your therapy bills, divorce settlement and the stitches you got from throwing your monitor through the plate glass window of your office. Then multiply that amount by the number of people in your company. Now you know the real value of your IT person.

When calculating what a job is worth to you, you might discover a position isn’t worth the money you’re actually paying. For instance, your new $50,000-a-year front desk receptionist may be the world’s best receptionist, but you just don’t find enough value in that position to justify the salary. So when it comes to rehiring for open positions, if you know a job’s value, you can quickly eliminate candidates who are too expensive. If you disqualify everyone who’s asking too much, however, it’s a sign you’re either under-valuing the job or you should just do it yourself.

Determining the Bottom Line

So now you know the most you’ll pay. The next step is to figure out the least you’ll pay. And that’s where the market comes in. Market rates set candidates’ expectations. Sometimes, the market underprices value. Truly excellent knowledge workers do ten times the work of merely good ones, but they’re only paid 20 to 30 percent more. Other times, the market overprices value (can you say “Fortune 500 CEO salaries”?). Either way, candidates will expect you to at least pay market rates unless you can offer good alternatives.

At the end of the day, you’ll pay a combination of what the job is worth to you and what the market demands. It’s also critical, when it comes right down to it, to consider each new hire individually. As much as we all love salary bands, you shouldn’t let the standard process blind you to the need for exceptions. When you’re hiring a salesperson with close personal relationships to your five hottest prospects, feel free to pay way above market. I sure would.

Finally, realize that you have a lot of flexibility if you expand your thinking beyond mere money. Some people value things other than money. You may be able to offer nonfinancial rewards. Flexible hours, casual dress, more time off, telecommuting, and impressive or creative titles can be offered in lieu of cash; training and professional development matter too. So use the market rates, salary expectations, the intrinsic worth of the job, and your creativity when deciding what to pay.

Edited for space; you can read Stever Robbin’s full article here.  

1 Comment. Leave new

It makes sense that you never want to pay more than what the job is worth to you. If you paid an employee more than what you can afford then it wouldn’t be good business. I like your idea of asking how valuable the position or person is to the company. If they have huge value, they should get paid more for what they do.

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