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How to Determine Employee Salary Ranges

Skye Schooley
Skye Schooley

Learn how to determine the best salary ranges to offer your new employees.

  • Establish employee salaries that are in line with industry averages and competitor offerings.
  • Offer competitive employee benefits to make your job opening more attractive to top talent.
  • Give inflation-based and performance-based employee raises.
  • This article is for business owners who want to know how much to pay new hires.

If you want to attract and retain top employees, you need to make sure you pay them competitive salaries. At the same time, you don't want to lose money by setting unreasonably high salaries. To find a good balance, follow these four tips for determining the right salaries for new employees.

How to establish employee salaries

To determine the appropriate salary for each employee, set a range for how much an employee in each position should be paid. Where each employee falls within that range will be based on the expectations you have for those employees and their past work experience. Although it will take more effort and time to determine salaries for brand-new positions, after you've established a salary range once, you will be able to use it as a starting point when hiring more employees for the same or similar roles.

Here are four best practices for determining employee salaries:

1. Do your research.

To attract and retain top talent, your employee salary range should be on a par with what other companies are paying for that position. If you have connections in the industry, you can start by consulting them.

Review job listings and career boards (e.g., Glassdoor, Indeed, LinkedIn) to see what the nationwide average is for that position in your industry. It's also helpful to narrow your search by location, as that will play a role in the cost of living and acceptable employee pay. For example, someone based in a large city will likely be paid more than an employee with the same position in a small, rural town, because the cost of living is higher in the city. You should also take into account the level of experience you expect from your new employee, as seasoned professionals will require higher salaries than entry-level workers.

2. Choose a realistic and affordable salary range.

Once you have identified the average salary for your open position, you will need to assess your business finances to determine a realistic amount that you can afford to pay. The salary you settle on should be within the average industry pay range, but it shouldn't cost you more than you can afford.

To find this sweet spot, you can also consider how much additional money the new employee will be bringing in (or saving) for your company. After you identify the maximum salary you can reasonably afford, you can securely go into salary negotiations with a number in mind, without the risk of going over budget.

3. Offer competitive benefits.

Offering a competitive salary is important, but employees expect more than just a paycheck. The best companies offer their employees flexible benefits, like competitive health insurance, retirement savings plans, health and wellness benefits, job flexibility, and professional development opportunities.

To attract the best employees, you should supplement their salary with additional benefits and a desirable company culture. This is especially beneficial if you don't have the financial means to offer the highest salary but still want to provide a great compensation package. [Read related article: What Are Fringe Benefits, and Should You Offer Them?] 

4. Discover job applicant salary expectations.  

After establishing an employee's salary and benefits package, find out if your potential applicant's salary expectations fall within your budget. You can discover this through effective interviews. If every candidate wants a salary that is way above your budget, it may be time to reassess your expectations or financial means.

If a highly desirable candidate's salary requirement is only slightly out of your budget, you can highlight the additional compensation offered through your benefits package. For example, maybe you offer unlimited paid time off, remote work options or a 401(k) match. These additional benefits could equate to the type of work-life balance that the candidate is looking for, ultimately winning them over.

Keep in mind that you want new hires to be happy with their salaries. Don't try to lowball candidates and then pressure them into taking the job, as they will likely be unhappy in the long run. Employee satisfaction is often linked to higher productivity and lower turnover rates.

Key takeaway: Look at industry averages and competitor salaries to establish an employee salary range that is within your budget.

What is included in calculating employee salary?

To determine annual employee compensation, consider all forms of payment your employee will be receiving. Do you provide bonuses, allowances and medical insurance? You will need to factor in this monetary compensation when calculating an employee salary. However, hourly rates for nonsalaried employees are slightly different.

Key takeaway: Net employee salary typically includes base salary, plus any allowances, bonuses and medical insurance.

What are other considerations for setting employee salaries?

Here are some other points to keep in mind when determining an employee's pay rate:

Stick to your budget.

Set a realistic budget for each new position, and keep all new-hire salaries for that position within your predetermined range. As part of this process, firms must decide if they want to be known as an employer that pays top wages for top talent or an employer who pays base wages (under midpoint) just to get someone to take the job, said Laura Handrick, a contributing HR professional for Choosing Therapy and owner of Laura H Consulting.

Raise employee wages when you can.

As employees continue to work for your company, they will expect bonuses and/or raises. Make sure to set wages that you can realistically increase over time based on inflation and performance. It is common to increase a new employee's wages after their three-month trial period ends and/or once a year to account for inflation or good performance.

Pay attention to your hiring cycle, as it may affect your need to raise wages as well. For example, Grant Aldrich, founder and CEO of OnlineDegree.com, said you should change salaries based on turnover; if turnover is high, you may want to raise wages to increase employee retention.

It is also time to give employees a salary increase when they've performed at a higher level or when you have to pay new hires more to get them on board for the same job, Handrick said.

"You don't want to have existing employees earning less than new hires in the same job, as you're likely to end up with disgruntled employees at the least, and may end up on the wrong end of a discrimination lawsuit if the existing employee is in a protected class (female, minority, over 40, disabled) and the new hire is not," Handrick said.

Key takeaway: Give employee raises based on inflation and good performance.

Skye Schooley
Skye Schooley,
Business News Daily Writer
See Skye Schooley's Profile
Skye Schooley is an Arizona native, based in New York City. She received a business communication degree from Arizona State University and spent a few years traveling internationally, before finally settling down in the greater New York City area. She currently writes for business.com and Business News Daily, primarily contributing articles about business technology and the workplace, and reviewing categories such as remote PC access software, collection agencies, background check services, web hosting, reputation management services, cloud storage, and website design software and services.