Are You Paying Employees the Right Wages?

Finding the compensation sweet spot will retain great workers without breaking the bank. But getting there can be a major research challenge for small-business owners.

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Your business is growing and it’s clear you’ll need to hire another employee or two by next spring.

Have the wages you’re offering kept up with what people expect? Or are you unwittingly paying a lot more than the market rate?

Knowing the appropriate pay rate for the people whose jobs are at the core of your business can be a significant challenge.

So how do you set pay rates? There are ways to arrive at the right answer systematically.

People Philosophy

Lisa Bazzoni is compensation director for MRA-The Management Association, an employers association based in Wisconsin and with offices in Illinois, Minnesota, and Iowa.

“The first thing a business owner needs to do is really determine what his or her people philosophy is,” Bazzoni says. “A lot of people skip this step, but it really provides a lot of clarity for the rest of the process.”

There’s a range of such viewpoints. Some companies view workers as an expendable resource — the proverbial “warm body” who has a specific set of tasks to fulfill and can be replaced when necessary.

To be clear, Bazzoni isn’t recommending that approach. But more than a few businesses operate just that way.

“At the other extreme,” Bazzoni says, “there are employers who will say of their employees, ‘This human being is an asset, and I want that asset to be with me for the long haul.’”

Whether you’re trying to live by that approach, its opposite, or something in between, she says, “A lot of pay decisions — and a lot of other people decisions — are going to play into whatever the philosophy is.”

Bazzoni continues: “If I am viewing my humans who are working for me as an asset, then maybe I’m going to pay a little higher than everyone else does, provide milestones for people and skill-based pay programs” that allow them to increase wages over time based on measurable and consistent metrics.

Gathering Data

Figuring out those market rates — whether your aim is to match them or consciously exceed them — is the next step.

Sure, you can surf the internet and probably find a lot of isolated examples, not to mention every opinion under the sun, for free. Even at that price, though, it’s probably not worth what you’re paying for it.

“It’s not very reliable,” Bazzoni says. “Reliable data has a price tag on it.” Reliable, she says, means “data that we can track to the source and verify its accuracy.”

Most likely you will get the best information if you turn to a consulting firm or an employers group like MRA — and if the data you get is compiled from sound methodology. Typically it will be collected from highly detailed surveys, anonymous so the employers participating can provide more candid answers. Ideally they will be answered by those employers’ human resources departments.

Solid data will be validated to reflect geographic differences and also different ways companies may define particular jobs.

“Job titles can be meaningless,” Bazzoni says. Good research will drill down beyond those to enumerate the different skill sets and responsibilities employers may assign to a particular position “so that your ‘equipment operator’ is the same as my ‘equipment operator.’”

By the Numbers

In these days of low unemployment, such data is likely to change often. “We typically recommend businesses look at this data annually,” she says. “When unemployment was higher, companies could get away with every three or four years.”

If you’re able to get solid data in hand, you need to look back where we began, with your fundamental human resources approach.

“If the market says the going rate is $20 an hour” for a particular job, Bazzoni says, “what you’re going to want to do is establish a range around that.”

For instance, do you know you want to pay above market as part of a strategy that builds long-term loyalty and commitment to the business? Consider setting the wage in that context a few dollars an hour higher. Are you deliberately paying under market rates, knowing that you’ll probably experience more turnover? Perhaps you’ll go down to $17.50 an hour.

And you’ll probably want to structure more complex wage systems, with bands for various titles and skill levels and then metrics for choosing where a given worker fits in those bands.

So where do you find that kind of information? Searching for compensation consultants and making sure they’re in your business field is one option. And employers associations are found in most parts of the country; consider checking out what they have to offer and whether it would benefit your business to join one.

Still, even the best-quality sources can have some limitations. If you’re in a rural area, the data is less rich because the labor pool is smaller, making it hard to establish the actual market price for particular skill sets.

And what if there aren’t any resources of that kind where you are? Or what if the price tag is steeper than you feel you can afford? There are other options for information. Some may have drawbacks, but they might be better than nothing.

Seeking Alternatives

The U.S. Bureau of Labor Statistics publishes lists of occupations and their pay rates by regions. You can find it by starting here: www.bls.gov/bls/blswage.htm. Then check listings by state or by metro area.

While reliable, it’s also likely to be a year old or more because of the time that passes between when it’s collected and when it is published.

“Your labor market might have changed in that period of time,” Bazzoni says.

There might be some data closer to home than you are aware of. Check your local chamber of commerce to see if it has conducted a compensation survey of its members, for example.

Still another source may be public-sector pay scales for people in the trades you’re employing. As public information, those should be relatively available. But they also come with limitations: government wages may be higher or lower than their private sector counterparts.

“I did a proposal for somebody who said, ‘We don’t want to compete with county employees — their salaries are very low and we’re drawing our people from the private sector,’” Bazzoni says. In other geographic areas, the opposite may be true: That government scales are higher than private sector ones.

Employer of Choice

Sometimes businesses rely on wage data from other locations, then factor in local cost-of-living data to adjust their own pay rates. That can be tricky, though.

“Cost of living and cost of labor are two different issues,” Bazzoni says. “For some jobs, you may have to pay more just to attract someone to your area.”

Having established your basic structure, Bazzoni advises, “You really have to keep your ear to the ground.” Casual employee chitchat, requests from job applicants for a particular pay level — none of these have the authority and reliability of a carefully conducted survey. But they do provide insight on people’s expectations in your industry and geographic area.

To be sure, pay alone won’t keep good workers or attract applicants, and pay alone might not be why people turn you down. Even if that’s what they tell you.

“When people turn down your offer, they’re always going to say it’s about money,” Bazzoni says. And if they do — and if that happens repeatedly — take it seriously.

But be aware that might just be an excuse for something else, including a bad reputation as an employer for other reasons: management style, poor communication, a lack of opportunity for advancement and many others.

“Are you an employer of choice?” Bazzoni says. “If you’re not training people well, if you’re not treating them well, no amount of money is going to help you.”



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