How to define salaries and pay rises for your employees

In the early stages of running a business you can get away with a pretty ad hoc approach to salaries but as your business grows you need to move to something more systematic.

For the first few employees it is possible to get by with rough benchmarking, tested by whether or not you attract applicants. Salary reviews can often be reactive affairs in response to dissatisfied or ambitious employees pushing for more money.

Once you get past a handful of staff everything starts to get more complex lack of a clear strategy can quickly become a headache. Before you know it you can find yourself facing multiple salary-related challenges.

This post sets out a few ideas on how to deal with the salary related challenges that your business will face.

Track and organise staff review dates

You should review your staff’s performance at least annually.

Treating your staff well is crucial to the long term health of your business and forgetting annual reviews or simply not having them is a quick way to alienate people.

The easiest way to manage reviews as you grow is to do them at the same time every year. This makes it easier to factor salary increases into your budgeting and aligns the discussion about pay increases with the company’s annual performance.

If you have a set date for pay reviews each year then new employees should be assessed on a pro rata basis (i.e. the increase they would have received if they had worked for a full year reduced to reflect the proportion of the year they actually worked).

Whether or not you choose to align review dates you will need some system for tracking information about your staff. There are various HR software systems available but, unlike in other areas such as CRM, small businesses are not well served by many of these offerings. You may be better off with a simple spreadsheet.

Structure salaries and pay rises

1. Distinguish between roles and performance

A crucial distinction to understand when considering pay is between the individual’s talent and skills and the role that the individual plays in your organisation. While pay may initially be limited by the individual’s level of experience or skill, ultimately the pay ceiling will be set by the role.

The role played by a staff member is described by their job description and often (though not always) summarised in their job title (e.g. marketing assistant, book-keeper).

Distinct from the role is the employee’s performance. This should be assessed against a range of factors (more below).

2. Assign value to roles and performance

Roles should be benchmarked (more below) to provide a broad salary range. Within that range an employee’s pay should increase in accordance with their performance. Your definition of ‘performance’ should reflect what you most value in your employees.

3.Review both roles and performance annually

The salary bands associated with company roles should not remain static. These should be reviewed every year to check they are still aligned with the market. Even within a reasonable static market you should expect some movement in line with inflation.

Treat your employees fairly and avoid gender discrimination in your pay structure

Research has shown that men are more likely to push for pay increases than women. This is one of the factors that contributes to the persistence of pay inequality.

The best way to ensure a fair approach to pay is to set out a framework that is as transparent and equitable as possible. In combination with regular (ideally synchronous) reviews, this ensures that a fair standard is applied to all employees irrespective of whether they ask for an increase or not.

Benchmark salaries

It’s very hard to benchmark individual performance but you can easily conduct a rough benchmarking process on roles. Roles are typically benchmarked to a range, allowing for significant salary progression within a role.

The first step is to define the roles in your organisation. Depending on your size, this may be difficult. The smaller you are the more likely you will have people spanning multiple roles.

Once you have defined the roles in your organisation you can search competitors websites to find out how much similar roles are advertised at. This exercise may lead you to tweak the roles you have defined. Recruitment firms often publish salary benchmarking information which can also be a very valuable resource.

Value performance

Once you have defined sensible pay bands, it is also important to have an objective set of criteria to guide what is inevitably a subjective judgement on an employee’s personal performance within their role.

Key factors to consider include:
* Skills
* Knowledge of your company ethos and processes
* Attitude
* Sector experience

What other questions / challenges have you faced with your business? Join the conversation by commenting below.