How to set salaries

Non-financial incentives, such as flexible working, training, extra holidays and a good working atmosphere all have their place in rewarding employees. But let's be honest, it's cold hard cash that's the main reason most staff come to work every morning. So, how do balance paying your staff enough to keep them happy while not breaking the bank?

So, how do balance paying your staff enough to keep them happy while not breaking the bank?

As a starting point, it is useful to find out what others in the same industry are offering for similar posts. This can be done by scanning job adverts in the local and national press and also by subscribing to one of the many detailed pay surveys that are conducted regularly. Recruitment consultancies are another valuable source of data.

‘You’ll probably want to try and pay the minimum within the norms set in your sector,’ explains Stuart Masterton of Business Link for London, ‘but it’s always worthwhile looking at the whole wage package.’

Employment experts usually advise that decisions on pay packages should be made on an individual basis, with each employee evaluated on their own merits. So, consider initially how much money is a motivating factor for each individual. For example, those with children or other responsibilities may accept slightly lower pay in exchange for flexible working, but others may want a higher guaranteed basic salary to help obtain or pay off a loan or mortgage.

For this same reason, it is risky to put too much emphasis on bonuses, says Charles Cotton, adviser on rewards at the Chartered Institute of Personnel Development. ‘It is tempting to link pay to targets but a low basic pay, even with significant bonuses as an incentive, can put a lot of people off.’

However, bonuses as a reward for long service can be an effective incentive. For instance, as Cotton explains, a generous bonus for three years’ service can promote loyalty. He suggests putting some money aside in a special account to ensure the funds will be there to pay the bonus at the appropriate time.

Most employees will expect, or certainly want, regular increases to their remuneration, so it’s important to negotiate effectively with team members on an individual basis when it comes to performance and salary reviews. ‘If more money isn’t on the cards, communicate the value of the existing package, emphasising the benefits of pension contributions and any other perks or added advantages,’ advises Cotton. ‘Moreover, vocalise how much you value their contribution to the business.’

However, the situation can arise where an employee gives management an ultimatum: a significant pay rise or they are off to join the competition. In this situation, there are both short- and long-term considerations.

‘It is very dangerous to give in to this sort of blackmail,’ warns Cotton. ‘Do it once and you leave yourself open to further demands from the same employee or others further down the line.’

First of all, the risk of this occurring can be reduced by avoiding over-reliance on one or two individuals. Ask yourself whether one person holds a great deal of knowledge or expertise that would be difficult, or even impossible, to replace. If so, try to spread this knowledge among other employees. After all, what would happen if that one person was hit by a bus?

Look at the impact that the loss of the individual would have and the value of them to your competitor. Then compare that to the costs of recruiting and training a replacement and the consequent loss of productivity.

‘If you do decide to pay to keep a key member of staff by giving in to this blackmail on pay,’ advises Masterton, ‘emphasise that it is an exception and it will not be happening again.’

See also: Is salary transparency a good idea?

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