How to Decide How Much to Pay Employees

— March 14, 2018

Setting employee pay can be difficult. You need to pay employees fairly and keep them from going to competing employers. But, you also don’t want to destroy your business budget by paying employee wages you can’t afford.

Determining how to set salary for employees doesn’t have to be arbitrary. By considering many factors, you can create wages that make both you and your employees happy.

What to consider when setting employee wages

Below are eight things to consider when determining wages for your employees.


When employees have more job experience, they typically earn more pay. For example, an employee with 10 years of experience normally earns more than an employee with two years of experience.

However, you should consider how long an employee has worked in the particular position. Career changes might give a worker many years of job experience, but fewer years in a certain field. You might adjust the employee’s wages to reflect this.


Employees typically earn more when they have more education. For example, an employee with a Ph.D. would earn more than an employee with a high school diploma.

You might also consider how applicable the employee’s education is to the job. If the employee has a Ph.D. in math but is working a retail sales position, the education probably isn’t related. In this case, it might not make sense to pay the employee more despite the higher level of education.


When determining employee wages, you should consider each employee’s performance and the value they provide your business. You might give increased wages to employees who go above and beyond. And if an employee brings in more revenue to your business, you might reward them with more compensation.


Your business’s location might be a big factor when determining employee wages.

Some states and cities in the U.S. require a greater minimum wage than the current federal minimum wage. Be sure to check your state and local labor laws.

Even beyond minimum wage, some locations generally have increased wages. This typically correlates with increased costs of living.


Consider supply and demand when choosing employee pay. If there is a reduced supply of workers for a certain profession, then the wages for that position will go up across the board.

You might need to look at demand nationwide and in your particular region. Some jobs are more prominent in certain regions, such as technology or agricultural jobs.


You need workers to choose your business over your competitors and other companies in the area. You must remain competitive. This means you must offer wages that are at least comparable to what other businesses are paying.


Employee benefits are an important part of the overall compensation package. One study found that 79% of employees would rather have new or additional benefits instead of a pay increase.

If your business provides low-cost employee benefits that employees prize, you may be able to offer a slightly lower wage while still making employees happy. This can be beneficial if your business can’t offer as large of wages as other businesses.


Most importantly, you need to determine what you can afford. Don’t put your business into debt by hiring an employee or giving big wage increases.

If what you can afford is lower than what is reasonable for the market and employee happiness, consider what other value you can give employees. You might be able to offer better benefits or work conditions.

Creating wage ranges

When you determine employee wages, try to create wage ranges for each position. This is a range with a minimum and maximum amount you are willing to pay. The minimum amount in the range makes sure you give each employee a fair and reasonable wage. The maximum amount allows room for negotiating and rewarding employees for good work.

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Author: Mike Kappel

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