Setting the right salaries is about ensuring your team is happy and motivated, while balancing that with your company's budget. Here's how to do it.

Going beyond the number

It will often be the reason that a potential new hire will choose your company over a competitor. It can be the reason your star employee keeps wanting to hit those targets. It will also invariably be one of your company’s most consistent expenditures. Setting the right salaries for your team is a fundamental aspect of running a business but also one that is a little more complex than it may first appear.

When thinking about how to set a salary, it is important to always be thinking beyond the number itself. That is because people will often care more about how their salary can grow and how it compares with their peers’ rather than what its discrete value is.

Promising regular salary reviews and providing an idea of the possible progression on offer can often be more appealing than simply offering a slightly higher initial salary. The most effective way of instituting that strategy is by offering small and regular bumps in salary as opposed to larger ones spread out over longer periods of time. For instance, getting a salary increase of £2,000 every 4 months will be more encouraging and motivating than a single increase of £6,000 at the end of the year. If someone is earning more than they used to earn, they will feel like they are being paid well.

Also, remember that people talk. You should set basic salaries with the working assumption that everyone will know them. Imagine they are public knowledge (without declaring them publicly) and act accordingly. This means that if two people have the same job title or almost identical responsibilities, you should have a very good justification for one earning more than the other. People’s salaries are comparative judgments of worth, so be sure to keep on top of what everyone is earning and make sure you do not let anyone fall too far behind. The best way to do this is by keeping a secure document that gets regularly updated.

A flat rate of pay is also not the only way to reward employees. On top of a basic salary you can also attract and retain employees by offering commissions, performance related bonuses, equity in the company or money to spend on learning and development.

How to determine the right salary

Other companies will also be paying their staff. They might even be paying them more than you can afford. If your offers are generally below the market value, then you have to be aware of that discrepancy and mitigate for it. Do your research and try your best to not offer significantly less than your competitors and always offer the minimum wage or above. If you are operating a new business and you cannot compete with the salaries offered by the established players in your industry, then be upfront about it with candidates and play on the perks you can offer—these might be stock options, flexible working or more responsibility earlier on in their careers.

When setting salaries for your team, be aware that location will play a huge role in determining how much candidates will expect to earn. If you are in a major city, then rent and other overheads are likely to be more significant. This means that salaries will in general be higher there than in a small town outside of an urban centre. On the flip-side, if you are running a tech start-up, you will likely find it quite difficult to attract talent if you are not based in a city centre, so you might have to actually bump up your salaries above market rate in order to stay competitive. There are also clear differences between the salaries on offer in different urban centres, especially if they are in different countries. For example, it costs more to hire a software engineer in London than it does in Lisbon.

During job interviews, always ask what a candidate’s expected salary is. If the answer given is consistently out of kilter with what you were planning on offering, then reassess the basic salary for that role. While you can never ask a candidate what they are currently earning, do remember that the most ambitious candidates will be naturally be optimistic and often ask for a higher salary as a first negotiating move. Even so, each candidate’s expected salary provides a good data point around which to base your final offer.

A final way of knowing whether you have set the right salary for the role is seeing if your offers are regularly getting turned down by the most promising candidates, or if once accepted, your most valued employees keep leaving for other roles, despite appearing happy with their work. Make sure you are doing your research and always do your best to follow or improve upon market rates.

Here are some useful benchmarking tools to refer to when thinking about how to set a salary: PayScale; Glassdoor; MichaelPage

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