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How Much Should I Pay My Employees? A Comprehensive Guide

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As a small business owner, one of your biggest financial decisions involves asking yourself the question, “How much should I pay my employees?” It’s a question most small business owners struggle with, especially those who don’t have a dedicated human resources department or who are hiring for the first time. But what to pay employees is an important question because according to a recent study by Glassdoor, 67% of job seekers consider salary to be a top factor in considering whether or not to take a job.

You want to hire and retain top talent, but you also need to create a business budget that allows your business to turn a profit and grow. So figuring out how much to pay your employees can be a balancing act. We’ll walk you through the best way to determine what to pay your employees. Here is everything you need to consider in order to pay employees appropriately while staying within your operating budget.

How much should I pay my employees? 

There are myriad factors to consider. One guiding principle to keep in mind is that a salary is an investment—so make sure you don’t pay more than you feel you will get in return. A good rule of thumb is to put 40%-80% of your business revenue toward employee salaries.

That said, deciding how much to pay your employees is a huge question to answer and a lot goes into making that decision. We’re going to cover the factors you need to consider as well.

Decide your budget for total employee salaries

Before you go ahead and decide what to pay one employee, think about how much you want to spend on the salaries of all of your employees. In other words, determine what percentage of your business’s revenue should go to your employee’s salaries. Keep in mind that this is likely your biggest business expense. But creating this budget will help you be sure you’ll have the funds to pay your employees, offer raises, and hire if you’re looking to.

Estimates for the percentage of your business revenue that you should spend on employee salaries vary greatly, especially depending on your industry. The percentage of revenue a restaurant spends on salary will likely be very different than the percentage of revenue an accounting firm spends on salaries. Other things like the age and the seniority of your employees can impact the amount to budget as well.

When creating a budget for paying your employee salaries you should also take into consideration the taxes, benefits, overtime, paid time off, and any reimbursements you expect to have to pay to employees. All of these costs combined should be part of your budget. As such, it can all end up being anywhere from about 40% to 80% of your business revenue.

The fringe benefits you offer will also increase this budget but they’re extremely important, offering good fringe benefits is just as important as paying a fair salary. A Randstad survey revealed that 55% of employees left a job because they found better benefits elsewhere. The IRS defines fringe benefits as “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.” This can include anything from social security and workers’ compensation to health insurance and paid time off. While it’s easy to think of a salary as the cost of employment, it’s essential you consider the cost of providing fringe benefits when trying to determine how much to pay your employees—lest you end up paying more in salary than what you had budgeted for. If you offer employee benefits such as health insurance, life insurance or a retirement plan, take the costs of providing these benefits into account. Their cost can equal 20% or 30% of an employee’s salary or wages.

All the while, know that your employees are still an investment for your business. So as you would with any money you’re putting into the business, think about the return on investment you’ll get from hiring a certain employee. Here are a few other things to consider:

  • How much time can that employee save you, and what is that worth to you?

  • If this employee is being hired for a more senior role, can they increase the ROI of other employees?

  • Can you afford to give this employee a raise if and when they ask for it?

  • What is the cost of onboarding this employee, both in terms of money and time?

Determining individual employee salaries

Once you have an overall budget for all employee salaries and benefits, you can start to look at what you’d pay one employee specifically. Most of the benefits will cost you the same regardless of the employee or their position, but the salary is what will vary much more. Here are some of the things to consider to determine an employee’s salary.

Type of job

The first thing you must do when determining what to pay your employees is write an accurate job description. This description should include the core duties of the job, the skills needed, and the level of experience required. You want the job description to be detailed enough that applicants can understand what they are applying for but it should also be generic enough that it can be compared to a similar job in your industry.

Note that job titles may not be specific enough to determine a pay range because roles can have different functions from one company to another. Writing a job description will help you make sure you’re comparing apples to apples when you research average pay.

Average pay

The next factor to consider when trying to figure out what to pay employees is the average salary for comparable roles in your industry. There are a few different methods you can use to find out this information. The first is to perform internet research. The Bureau of Labor Statistics has a page in which they detail average pay rates for different industries and different regions. Websites like PayScale, Glassdoor, Salary.com, and LinkedIn also publish reports on salary data. We also recommend using keywords from your job description to get as specific as possible. For example, find out what the going rate is for key skills like bookkeeping or data research.

You also need to factor in the geographic location of your job to get an accurate idea of what to pay employees. The average pay for the same job can vary depending on the cost of living in certain locations or whether there are too few, or too many, qualified employees in the area. We recommend the help of other businesses and recruitment firms in your area to get a better understanding of the local market for the role you’re hiring for.

While your researching average pay, look for low, average and high pay rates for a job, and create a pay range you feel comfortable with. This gives you the flexibility to offer candidates with more experience or skills higher wages—if you determine that they are worth the investment.

Candidate pay expectations

Of course, the candidate will also come to the table with an expectation of how much you should pay them. This is why it’s important to enter salary negotiations with a range in mind. For a candidate who meets the essential qualifications of the role, you may want to offer them a salary in the lower to medium range of the average salary for the job. But for a candidate who exceeds expectations, you may try and entice them by offering a salary in the higher range.

Note that when you’re negotiating salary, you want to keep in mind what you think your ROI would be. If you offer a highly qualified candidate a higher range salary, do you feel they will deliver enough value to make your investment in them worthwhile? This is often one of the hardest questions to answer when figuring out how much to pay your employees, and it underscores the importance of doing your homework before making an offer.

Laws about paying your employees 

There are obviously going to be plenty of factors to consider when choosing how much to pay your employees. The most important ones for you to follow are going to be the legal parameters for employee pay that help answer the question, “How much should I pay my employees?” We’ll go over the legal parameters you need to factor in when determining salary.

Exempt vs. nonexempt employees

When considering how much to pay your employees, it also helps to know the difference between exempt and nonexempt employees. The Fair Labor Standards Act (FLSA), the federal law that regulates employment policies, recognizes two types of employees. Exempt employees are not subject to minimum wage or overtime pay laws; they must be paid a salary—a set amount of pay no matter how many or few hours they work. Nonexempt employees are entitled to minimum wage and overtime pay. They’re typically paid hourly, but some are paid salaries. For more information on determining if an employee is exempt or nonexempt, see this Department of Labor fact sheet.

Generally speaking, the FLSA recognizes three main categories of exempt workers: Administrative, professional, and executive. These three categories are purposefully broad. Most other categories of an employee can be considered nonexempt, although not all are.

Labor laws

Exempt vs. nonexempt is only one part of the labor law that employers must comply with when determining how much to pay employees. The FLSA also sets specific minimum wage and overtime pay standards that you need to consider when asking: “How much should I pay my employees?” Many states also set their own minimum wages—and employees are entitled to the higher of the two minimum wages. New York, for example, currently has a minimum wage of $11.80, while Florida has a minimum wage of $8.46. The federal minimum wage is $7.25 per hour, meaning no state can pay less than $7.25 for a minimum wage job. The Department of Labor website has more information about minimum wage laws in each state:

  • For nonexempt employees, overtime pay at a minimum of one and one-half times the regular rate of pay is required after 40 hours of work in one workweek. The Department of Labor’s Wage and Hours division has tools you can use to calculate hours worked and overtime. (Some states, notably California, require overtime to kick in at more than 8 hours worked in a day).

  • If you want to pay employees, such as employees making craft items or garments, on a piece-rate basis, you can do so as long as the piece rate is at least equal to the minimum hourly wage rate (and overtime, if employees work more than 40 hours per workweek).

  • If your employees regularly collect more than $30 a month in tips, such as bartenders, waitresses or hairdressers, you can count tips as part of their wages, but you have to pay a wage of at least $2.13 per hour and meet some other requirements in order claim a tip credit. (See this fact sheet for more information.)

Reimbursement

Some states, like California and Illinois, stipulate that you as an employer have to reimburse employees for work expenses. Not all states require this but more and more have been enacting laws that require employers to repay their employees for work-related expenses, think food while traveling or mileage for employees who have to use a personal car for work.

For milage, the IRS standard pay is $0.58 per mile for miles driven for business, this is to cover gas and wear and tear on the employee’s vehicle. The rate varies for some other industries, and while it’s not required by law to reimburse this money, its standard practice in business, along with other reimbursements as well.

The bottom line

When it comes to the question: “how much should I pay my employees?” hopefully now you have a better idea of where to start. Do research, learn about labor law compliance, and work out your budget. If you have any questions or concerns, run your plans by an accountant or attorney familiar with tax issues and employment laws. Remember that you’re not just assigning a number to a job, you’re hiring a person and you’re investing in your business. So while you want to keep your business’s interests in mind, you should also be fair and reasonable with your employees. After all, they are the ones who are going to help your business grow.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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It's never been more clear: companies should give up on back to office and let us all work remotely, permanently

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  • With the rise of the Delta Variant, companies should switch to all remote.
  • All-remote is better for workplace collaboration, the environment, and companies' bottom lines.
  • Companies that switch to all-remote should be intentional about collaboration and technology.
  • Jeff Chow is SVP Product at InVision.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider's business page.

It's time to go back to the office for good – the home office.

With the CDC's recommendation that even fully vaccinated people wear masks indoors in areas with "substantial" and "high" transmission of COVID-19, employees across industries are wondering what the new future of work looks like. As the possibility of another shelter-in-place order looms, companies are deciding whether moving to a hybrid situation – simultaneously in-person and remote – is worth it.

It's not. Simply put, the concept of "forever remote" makes sense for numerous companies and industries. For many, America's "back to work" isn't a simple light switch, but many organizations are better off to shut the lights off at the traditional office. The switch to all remote will broaden a company's talent pool and increase employee happiness and retention, while limiting a lease and lowering its carbon footprint.

There are benefits to becoming a fully-remote organization. A top example is that the talent pool now goes national, or even international. Organizations are no longer limited to recruiting employees from a given radius to their offices. Asynchronous work helps to open the door for employees to work across time zones to get projects and deliverables completed in time.

InVision, where I work, has been all-remote since its inception. We have the luxury of hiring people living across the US and in 25 countries.

Additionally, without the need for a large physical office presence, companies can save hundreds of thousands of dollars, if not more, on leasing office space or building an expansive campus.

There is also evidence that eliminating an office for all employees to work remotely is better for the environment. Eliminating a daily commute, whether it's driving a vehicle or taking mass transit, helps cut down on emissions. This was initially noticed back in the spring and summer of 2020, when a decline in transportation due to the COVID-19 pandemic led to a 6.4% decrease in global carbon emissions, which is the equivalent of 2.3 billion tons. The United States had the largest drop in carbon emissions at 12%, followed by the entirety of the European Union at 11%.

In a June 2021 McKinsey survey of over 1,600 employed people, researchers found about one in three workers back in an office said returning to in-person work negatively impacted their mental health. Those surveyed also reported "COVID-19 safety and flexible work arrangements could help alleviate stress" of returning to the office. Not everyone who works for the same company is going to get along. In an all-remote environment, it is far easier for people who are at odds to simply avoid each other. HR won't have to spend nearly as much time mediating between (or terminating) office Hatfields and McCoys.

So, how exactly do you quickly pivot to remote again and stick with it? The key is intentionality. Teach managers to make a point of celebrating wins and good work on group calls. Build encouraging collaboration into managers' Key Performance Indicators (KPI)s. Take advantage of face-to-face opportunities by holding in-person, all-company all-hands meetings as a time to build culture, not a time to just do more work.

Treat working groups to dinner (use some of the money you saved on your lease!) and let them get to know each other as people. To be intentional, invest in new ways of working that are oftentimes better ways of working: reducing necessary meetings and adjusting more feedback sessions to asynchronous collaboration. Meetings that remain on calendars should be reserved for the purpose of being highly engaging and energizing moments for teams to brainstorm and do generative sessions.

Second is technology. By now, we're all familiar with the likes of Zoom, Slack, and Microsoft Teams, but there are other products that can actively improve collaboration (full disclosure: I work for InVision, which makes one such digital collaboration tool, namely Freehand).

Take a thorough look with your IT team (and talk to your employees) to see what they need on a day-to-day basis. What tools does your accounting team need? Do they differ from what the marketing team needs (spoiler alert: they do). And don't force everyone to use the same tools. If your accounting team loves Microsoft Excel, that's fine for them. I can guarantee, however, that your product design team is not going to use it.

Finally, invest in your employees' ability to make the transition (again).

GreenGen, which provides green energy solutions for businesses and infrastructure projects, had one of the most pioneering ideas. "We had our employees do a two-day work-from-home resiliency test. This was to ensure that everyone's home Wi-Fi was adequate so that all of our documents and materials were easily accessible online, and that we could troubleshoot any potential problems preemptively," said Bradford H. Dockser, Chief Executive Officer and Co-Founder of GreenGen. "Ensuring that our team members got monitors, mice, and keyboards at home made the transition seamless." With that sort of intentional stress test, GreenGen didn't skip a beat.

Above all, the main key to returning to the home office for good lies within communication. Technology and innovative products have helped to bring colleagues closer together virtually, as people work from anywhere at any time. Initial shelter-in-place orders taught many businesses across industries that remote work can be just as effective, if not more so, than the traditional office model. Businesses should make the call to go all-remote permanently. Their employees, their investors, and the environment will all thank you.

Read the original article on Business Insider

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How to Boost the Morale of Your Employees

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Employee morale is something that every business owner needs to consider and not just because it makes the workplace a nicer place for all (although this is a very important reason). High morale can result in improved productivity and overall team performance, employee loyalty and greater engagement, but it is also not easy to keep morale high and this can create a range of problems in the business.

So, how can a business improve the morale of the employees?

Use an Interior Designer to Redecorate

One study revealed that 97% of workers believe that the workplace symbolises how they are valued as an employee, so you will certainly want to create a comfortable and stylish workplace for staff (especially if they are returning after COVID-19). 

The same study showed that 65% claimed that they would consciously improve their performance in a more comfortable environment, so a smart way to improve morale would be to hire an interior designer to redecorate and use trade interior suppliers to secure the best office furniture for a more comfortable and attractive office space.

Work/Life Balance

Work/life balance has always been an important factor for staff that can have a huge bearing on morale, but particularly since COVID-19 which has changed people’s ideas and attitudes towards work (and life). You need to make sure that your company is providing the chance for a good work/life balance, which you can do by ensuring that staff are not overworked and stressed, with flexible work and the option of working from home (many are adopting a hybrid work model).

Socialisation

It is hard for employees to feel happy in their role if they do not get much chance to engage and socialise with their colleagues. This is why you should encourage employees to spend time together inside and outside of the office, which you can do by arranging informal social events after work. You cannot force people to get along, but by arranging informal events it can make a big difference to relationships and lift morale.

Communication

Following this point, one of the most important steps to take not only for morale but for general performance is good communication between management and staff. You should be providing regular positive feedback to keep morale high, but you should also keep your door open and make sure that it is easy for staff to come forward when they have ideas, issues or questions. 

These are a few of the most effective ways to lift morale that could make a big difference to your company in more ways than one. Improving morale can improve individual and team performances, encourage staff loyalty and create a positive workplace atmosphere that everyone can benefit from.

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Is Telecommuting Right For Your Business?

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Telecommuting is a big aspect of working life for many people, with evidence suggesting that more and more workers are interested in doing it sometime in their career – if… Read more »

The post Is Telecommuting Right For Your Business? appeared first on Noobpreneur.com.

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