Sally, a small business owner, generated about $120,000 in gross sales. After expenses, including a part-time employee, Sally took home about $30,000 in exchange for 50–60-hour work weeks. This situation lasted for five years and was unsustainable, so Sally knew she had to take action to change her circumstances. That’s when she decided she needed a business coach and found me.
Today, four years later, Sally’s business employs 15 individuals and generates about five million in gross sales; her salary is generous. Yet, among the growing pains of a small business, achieving equitable pay scales for her employees has been challenging.
It’s not difficult for entrepreneurs to decide what and how to pay themselves, but it’s more challenging as you build your team. How much should you pay employees? How can you keep salaries fair and reflective of experience and contribution? How do you prevent your company from overspending on payroll?
Your first employee comes on board, and you think, hmm, I have about $40,000 remaining in my budget, so that’s what I’ll pay this person. That can work, but then your second, third, and eventually tenth and eleventh employee comes along. The $40,000 you pay your current employee isn’t enough to attract new talent, so you pay them more. This cycle perpetuates itself, and before long, you have a valuable and experienced team member who’s been with you for two or more years, making less than the new person with less experience. Payroll is a mess, and when word gets out, morale is even worse.
Use equitable pay scale ranges to solve this payroll dilemma.
Is it time to grow your team? There are many things to consider, and most entrepreneurs fail to look at the future financial picture before they take this important step. After all, you don’t know what you don’t know, right? Here’s a simple plan to help prevent a division in your culture and a negative balance in your business bank account.
Create an organizational chart.
Research pay scales for each listed position in your geographical area. If you are a remote business, you must research the areas where your employees live. Some websites, like payscale.com, charge a fee to keep national and local averages up to date, but as a small business owner, you can use ziprecruiter.com or indeed.com to do your research. There, you can find a scale for the job you intend to fill, from low to high.
Create a pay range for each position.
Now that you know the salary range, separate it into three sections so you have three pay ranges within each pay grade. For a pay grade with a $50,000 salary limit, it might look like this:
$39,000 – $43.500
$43,501 – $47,000
$47,701 – $50,000
Now, assess what skills, experience, and qualities are for each range in your pay scale. For instance, say you’re hiring a coder. You will pay someone right out of school a different wage than someone with three to four years of experience. You’ll pay someone with eight to ten years of experience, eager to help your company grow, and a great fit for your culture, far more than you’d offer the newcomer to the industry.
Now, list the levels of experience. Identify,
- How applicable must the experience be to your industry and goals (how much training is necessary)? Will a software engineer from the banking industry seamlessly fit into your software development company?
- What level of education is the bare minimum your new employee needs?
- What skills would be ideal for each pay grade level? Again, how much training will they require?
- Whether they will manage other employees.
You can identify any markers that apply to your company and industry.
A pay scale will make your payroll system fair and equitable.
As you answer the questions above, you will create a clear, easy-to-understand scale with bullet-pointed qualifications, which is important on many levels. It will:
- Prevent pay bias in the hiring process.
- Take the guesswork out of your process when making an offer.
- Help you offer clarity to employees who ask for unreasonable raises (more on this later).
- Help to prevent your business from overspending on payroll.
- Create a fair and balanced payroll system.
Before you conduct an interview, use the CV and your new system to get a general idea of the pay range for your candidate.
How do you create equity if payroll is already imbalanced?
This pay scale system will prevent future discrepancies, but what if your pay scales are already imbalanced? Using the computer engineer example, what if the person you hired three years ago earns $50,000, but today, you must pay a second person of equal talent and experience $65,000? Unless you are willing to lose your original person, you will have to adjust their pay to match (at the minimum) your new employee. Keep this in mind as you hire new talent; the payroll cost will increase substantially because of this pay adjustment if one is necessary. If your original computer engineer is amenable, you can make this adjustment over time, but you would risk a morale issue.
How to manage raises and promotions.
There are many different types of raises, but I usually suggest that a small business owner focus on only three:
Cost of Living (COLA).
The US Department of Labor determines a cost-of-living adjustment (COLA). Since 2021, the increases have been on the rise since living in the US has become more costly. However, just because the Department of Labor says the COLA is 4.5% does not mean you must offer 4.5%. Offer what your company can afford; otherwise, your employees could be at risk if your company struggles financially.
I often suggest that my clients begin a new employee as a contractor (1099) for about three months before converting them to W-2 status. This tests if the employee and employer are a good match, whether or not the employee can deliver as anticipated, and if the job will keep the person engaged and productive. At the 3-month mark, if you bring your contractor on board, a pay increase is a great show of faith and goes a long way to keep your culture intact.
A completion raise is also applicable to goal completion and increased education experiences. A significant raise is certainly appropriate if your team member completes a training program or returns to school for an applicable degree. When you do a performance review and offer a list of goals to an employee, a raise may be in order once they successfully achieve the goals. Large project completion may merit a bonus or increase in pay.
Each time you do an employee performance review, giving them goals and suggestions for advancing skills, education, or goals is wise. This is the time to discuss how they get along with other employees and customers. As they achieve these benchmarks, a merit raise is advisable. Hitting benchmark years at your company is another reason for a merit raise.
Side note: Many small business owners neglect ongoing or annual employee feedback. Remember this: Your employees are your number-one asset. Do not neglect them or fail to acknowledge them. In terms of importance, they come first.
Too often, I hear that employers add to the responsibilities of their employees without proper compensation. This is especially true when an employee is asked to manage others. The salary for a manager is higher than someone whose responsibilities end at their own performance. Promotions are based on performance, need, and team members' ability and willingness to grow.
Generally, reviewing pay structures regularly is a good idea to ensure that all employees are paid at levels comparable to those for similar positions in the market. Keep your team members happy and engaged, and your life will get easier—your business will be more profitable!