Calculating your employees’ salary is a key task for any small business. Every successful company relies on a team of talented, focused, and motivated employees. As such, it is vital that you are able to attract and retain a skillful team in order to ensure that your business remains in good health.
So, how do you do that?
By offering a competitive and attractive salary in addition to additional factors like PTO, vacation days, and bonuses, you can increase your chances of building a reliable team. However, this is easier said than done for small businesses with a limited budget.
Here’s how you can successfully calculate a reasonable salary that satisfies your employees and falls within your budget.
Tips to calculate your employees’ salary
Calculating your employees’ salary doesn’t have to be a difficult process. Follow these tips to determine a reasonable salary for your team members.
#1 Be Aware of Legal Requirements
First, you should be aware of some of the legal and tax requirements associated with payroll.
Businesses are required to pay employment taxes according to the Federal Insurance Contributions Act (FICA). These taxes go to programs like Medicare, Social Security, and Unemployment (ruled by the Federal Unemployment Tax Act or FUTA). You should consult with a professional to learn how to file taxes as a small business.
You are also required to maintain employee payroll records for a minimum of three years. This includes:
- Name, address, phone number, and Social Security Number of the employees
- Start date
- Offer letter
- Pay rate
- Whether the employee is paid hourly or annually
Go to the Equal Opportunity and Employment Commission’s website to view all of the records you are required to retain.
#2 Research What Others are Paying
If you want to be able to offer a competitive salary, you have to be aware of what other companies are paying employees for the same positions that you are hiring for. If your offer is below your competitors, you likely aren’t going to attract the type of talent that you need to succeed.
Luckily, there are plenty of market research resources to help gather this information.
- First, you can start by checking job boards like com or Glassdoor. Search for the positions you need to fill to see what other employers are offering. You should be able to get a good idea for a competitive salary based on this simple research. Be sure to narrow your search down to your area as salaries can vary widely based on the cost of living.
- Additionally, PayScale is one of the largest salary databases available to the public. This is a great resource to find market rates for different positions in certain areas.
- Lastly, the Bureau of Labor Statistics has an Occupation Comparison Surveys that can provide you with wage data by area an occupation.
Remember, you don’t have to offer more than everybody else, but your salary offer has to be in the same range as offers from similar businesses in order to attract top talent.
#3 Decide Between Hourly or Salary
In addition to determining a competitive rate, you also need to decide between hourly and salary. There is no right answer here, but you may decide to choose one over the other based on your circumstances.
What are some of the main differences between these two payment methods?
- Hourly employees receive limited perks and benefits. Additionally, they can work more than 40 hours every week but must be paid overtime. Scheduling can be more flexible with hourly employees, but you have to be sure to document every minute worked in order to avoid wage theft. Generally, hourly is great for businesses like restaurants which don’t require as much labor during slower hours.
- Salaried employees, on the other hand, typically expect better benefits, more vacation time, and standard hours. You typically don’t have to pay salaried employees overtime, but they are expected to complete all of their work regardless of the time it takes them. Generally, salary is the way to go for businesses that have consistent work that requires employees with special skills or knowledge.
#4 Determine Vacation Days and PTO
Your offer package should also indicate the vacation time or paid time off (PTO) that you allow for full-time employees.
- Vacation time typically includes paid holidays, paid vacations days, paid personal days, and sick days. This system allows employees a certain amount of days to be taken off, but only for the designated reasons. For example, if you allow employees to take five sick days, they can’t use those days to go on a vacation.
- Alternatively, many employers offer PTO, which is simply a certain amount of paid days off employees can take per year for any reason. This is typically better for employees but can be worse for businesses as employees are sure to use all of their PTO whereas they might not use all of their sick days if you’re using the first method.
One way to save on PTO is to compensate it with the salary. For example, you can offer less PTO for positions with a higher salary. This can save you money (since your employee will be productive for more days) while still being able to offer a competitive salary.
#5 Consider Bonuses
Bonuses based on milestones are a great way to save on salary while still attracting top talent.
How does this work?
Essentially, you can offer a lower salary but offer large bonuses if employees accomplish certain goals. This creates the potential for employees to increase their salary but only to the benefit of the company: if you have to pay more when your employees reach certain milestones, it’s because that’s generating and additional revenue for your business.
#6 Include Benefits
Any competitive salary offer should include a benefits package.
Healthcare in America is extraordinarily expensive. As such, employees expect their employers to offer healthcare plans in addition to their salary.
Additionally, 401(k) matching helps employees save for their retirement by having their 401(k) contributions matched by their employer.
Other common benefits include dental plans, relocation stipends, paid travel, and more. Keep in mind that attractive benefits packages give you more room to offer lower salaries.
#7 Have in Mind Other Factors
Beyond the factors listed above, there are other things you should consider when calculating your employees’ salaries.
For example, you’ll need to adjust salaries on a yearly basis to compensate for inflation (the general increase in prices and standard of living).
Moreover, you’ll be expected to offer raises based on experience. If you don’t offer raises, your experienced employees are likely to look for higher paying opportunities at other companies — leaving you with a less talented and less experienced team. Similarly, you should offer higher salaries to employees with higher education levels.
Calculating your employees’ salaries goes beyond the money itself. Bonuses, benefits, raises, stock options, vacation, and other factors should be taken into consideration when creating an offer package. If after considering all the factors above you resolve you can’t pay a fair salary and also offer a reasonable compensation package, it may be not the best time to bring new employees to your business. Find creative solutions to compensate for the lack of staff: offer internships, work with family members, hire contractors or freelancers for a very limited time. You can also find ways to reduce your labor costs without affecting your employees’ current salaries.
In other words, a good salary and compensation package are key to keeping your employees motivated, but there are also creative ways to retain your best employees that don’t involve a restraint in your budget.
At Camino Financial, our goal is to empower small businesses in order to create new jobs and stimulate economic growth. For more small business management tips, be sure to subscribe to our Newsletter. It’s free and every week you’ll receive useful tools and resources to better manage your finances and grow your business.