Businesses thrive when their employees thrive. This assumption underscores a fundamental practice: companies that pay their employees fairly motivate them to give their best. Nevertheless, the question remains, how much should companies pay employees? The answer to this question involves understanding labor market dynamics, sound business practices and, you guessed it, supply and demand.
In a competitive business world, companies must seek to find advantages to beat their rivals. As a result, deciding how much to pay employees becomes a significant business decision.
Read more for useful guidelines business executives can use to compensate employees fairly in a competitive business environment.
It Is Not Always About Money
In fact, it’s rarely about the money.
Employers and employees commonly believe that compensation is simply about money. While it is true that compensation involves a monetary salary, the fact is that compensation goes beyond a paycheck. Compensating employees fairly demands an appropriate balance of monetary and non-monetary compensation.
Human behavior expert and author Alfie Kohn remarks:
“I recommend that employers pay workers well and fairly and then do everything possible to help them forget about money. A preoccupation with money distracts everyone – employers and employees – from the issues that really matter.”
This statement underscores the need for employees to feel comfortable with their compensation and inspired by the organization. When employees feel adequately compensated, they can focus on what truly matters to all stakeholders. Ultimately, companies will see the benefit of this approach in their employee retention and their bottom line.
How Much to Pay Employees?
Determining how much to pay employees boils down to market forces. Simply put, the law of supply and demand ought to guide employers in establishing employee compensation parameters. In practice, however, it is not always quite that simple.
Firstly, top talent demands higher wages due to their relative scarcity. The best performers in any profession command the top ten percent in wages given the results they can produce.
Secondly, unskilled labor is far less expensive since it is much more abundant than skilled labor. Consequently, entry-level positions tend to offer lower wages than those requiring skilled workers. When employees show exceptional skills and personal qualities, they tend to command a higher salary. Companies keep this criteria in mind when choosing to fill entry-level positions with skilled and experienced staff.
Thirdly, companies must also consider minimum wage regulations in their cities or states. The federal minimum wage currently sits at $7.25 per hour. However, many states have specific minimum wage regulations in which employees are subject to a higher minimum wage – often more than double the federal requirement.
At this point, the following assumptions emerge:
- Companies should pay unskilled workers or entry-level positions according to the approved minimum wage legislation (federal minimum wage is $7.25 an hour with some cities and states paying up to $14 an hour in California).
- Businesses must consider paying their highest skilled workers an above-market average salary.
- The bulk of employees should receive a market-average salary.
The question now becomes: how can companies determine a market-average salary?
Companies should consider paying regular employees according to the market average. To determine what “market average” means, business executives can refer to the Occupation Outlook Handbook. The US Bureau of Labor Statistics publishes a wide range of job data in the Occupational Outlook Handbook. This guide provides job seekers and employers with detailed information on virtually every type of employment area in America.
How do tools like the Occupational Outlook Handbook help companies determine an average market salary?
The information contained within these tools breaks down employment prospects and historical salary ranges per industry and occupation. Let’s consider the following example to illustrate this data’s usefulness.
According to the Occupational Outlook Handbook, the 2020 median pay for a Financial Analyst is $83,660 annually or $40.22 per hour. The data also shows 492,100 financial analyst positions in the market with a project 2020-30 growth of 6%, representing 31,300 new jobs in this field.
Let’s unpack this data
Firstly, an average financial analyst with a bachelor’s degree in tow earns close to $84,000 a year. This figure implies that any company looking to hire a financial analyst at a market average salary can expect to pay this amount.
Secondly, the financial analyst position projects a 6% growth over the next ten years. This growth rate is consistent with average growth rates across the market.
Thirdly, the addition of 31,300 new jobs over the next decade bodes well for newcomers looking to gain entry-level positions.
What does this data mean for companies?
Companies looking to hire a financial analyst can expect to find an abundance of interested professionals looking to enter this career field. Consequently, the median salary may go down over the next decade as more professionals attempt to enter the field. Nevertheless, businesses must understand that the top performers in this field will earn above the market average.
Ultimately, the Occupation Outlook Handbook can provide business executives with real-life insider intelligence into how much employees earn according to their profession. Moreover, growth projection rates and employment perspectives can help companies plan their compensation packages for current employees and future hires.
Subscription Salary Information Sources
Private market research firms offer salary information via paid subscription services. These companies publish some free data though the bulk of their analytics are available through paid subscriptions only.
Here are three sources to consider:
PayScale is a salary and compensation analytics service. It offers insider information on market-average salaries, compensation packages, surveys, and data sets. This site offers robust information businesses can use to crunch data to determine their best compensation schemes.
PayScale’s products include “Insight Lab,” “Pay Factors,” and “Market Pay.” These subscription-service tools help businesses calculate fair compensation, establish competitive compensation packages, and get data-driven analyses.
Please note that PayScale offers its data on a subscription basis. Nevertheless, PayScale allows businesses to try their services for free before committing. It is worth giving the free trial a chance.
Salary.com does precisely what its name suggests. It offers accurate information on average salaries across all career fields. This great tool allows employers and workers to figure out fair compensation. Employees can check how much they can expect to earn while employers can accurately picture how much they ought to pay.
Additional features on salary.com include the “Get Pay Right,” “CompAnalyst,” and “JobArchitect” products. These products are part of salary.com’s paid subscription service. They are worth considering, particularly for startup companies to build their employees’ career paths and compensation schemes.
3. Salary Expert
Salary Expert is a paid subscription service that provides compensation data including cost of living. The analytics help companies establish accurate pay structures based on a number of criteria such as minimum wage, region, and average salaries.
Salary Expert provides subscribers access to its compensation management software to manage various types of compensation plans. In particular, this software allows companies manage complex compensation schemes that include bonuses, commissions, performance goals, and market data. These elements allow companies adjust their pay structures to suit their needs. Salary Expert offers a free demo before committing to a paid subscription plan.
Statista in an all-around data service corporation. It collects and publishes data on a wide range of topics, sectors, and regions. Particularly, Statista’s labor and wage data is highly insightful. Statista publishes some free information though the heart of its data sets come with paid subscriptions. Individual users can get access for $39 a month. Corporate accounts start at $745 monthly for the full-access version of their services (includes stats, forecasts, reports, outlooks, usage rights, and licensing agreements).
Additional Sources for Salary Information
Business professionals can consult other sources of information to get insight into salary data. The information in these sources may vary though they can provide valuable knowledge. Here is a look at the most reliable sources in the market.
Glassdoor acts like a review site for employees. Current and former employees can review their experience by describing various aspects related to their jobs. One of these aspects is pay. Employees can indicate how much they earned according to their job, company, and experience.
While Glassdoor’s information may vary somewhat from the Occupational Outlook Handbook, it is great because it allows companies to see the high and low end of the salary spectrum. Consequently, business executives can decide how much to pay newcomers, top performers, and average employees.
Please bear in mind that Glassdoor’s information is largely self-reported. Thus, it is a good rule of thumb to corroborate salary data with other information sources.
2. Job Boards
Job boards such as Indeed, Monster, and ZipRecruiter also offer salary information based on job postings and user data. Most of this information is freely available on each site. Business professionals looking for additional insights can check out these sites. Companies already using these sites for recruiting purposes can leverage their data to make compensation decisions.
There is an additional information source employees and business executives can consult: LinkedIn. LinkedIn offers relevant salary information across a wide range of career fields. Given LinkedIn’s position as the world’s premier business networking site, it is certainly worth double-checking pay information using LinkedIn’s free and subscription data services.
3. Industry-Specific Salary Information
Various trade organizations public salary information specific to their industry. These sources provide detailed insights into market salaries within individual industries and sectors. Here is a look at some of the organizations that publish industry-specific salary information:
- SME, the leading association of manufacturing professionals, publishes an annual report on manufacturing compensation. This report provides detailed information regarding the manufacturing industry’s trends regarding salaries and benefits. SME offers free information though members have additional perks.
- The National Mining Association publishes information on average salaries for US Mine workers. This information delivers insider knowledge into what mining companies can expect to pay professionals in this industry.
- The Association for Financial Professionals issues an annual compensation report covering the financial industry’s wage trends and job outlook. This report provides detailed analytics for companies and professionals.
Using industry-specific sources is a great way of cross-referencing data from sources such as the BLS or private research firms. Specifically, cross-referencing data allows business executives to gain further objective criteria when designing compensation plans.
One Final Thought
Getting compensation correct can be one of the most challenging tasks for business executives. These decisions hinge on gaining access to the best available information in the market. Therefore, companies must consider consulting multiple data sources to cross-reference currently available information. The best place to begin is the Occupational Outlook Handbook. It is the most comprehensive database in America. From there, additional services such as Glassdoor, LinkedIn, or Indeed can help provide further insights. Businesses can then build appropriate compensation schemes to help their employees focus on what truly matters.
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This post is made available for informational purposes only to provide a general understanding of the topics discussed herein. It is not intended to provide specific business, legal, or professional advice and should not be relied on as such. TalentZök is not liable or responsible for any damage or loss arising from any reliance placed on such materials.