Consider the costs

For small business owners and employers, setting salary levels is one of the most important decisions you can make. Pay can form a major part of a company’s costs; it can affect employee performance and loyalty and getting it right will avoid unnecessary conflict.

If you are thinking about recruiting staff, you will also need to consider ‘one-off costs’, such as advertising the position and the time spent sorting through applications and conducting interviews. Remember, this is time you might be spending on generating sales, so try to estimate how much time you will spend away from your day-to-day tasks. If it is too much, consider using an employment agency. This may cost more initially, but should free up time for you to continue with your business.

Get the levels right

Setting the right pay levels will make it easier to attract quality staff and to retain them. Deciding on how much to pay staff can be difficult. The Advisory, Conciliation and Arbitration Service (ACAS) offers advice on setting salaries. Finding a balance between what your business can afford and avoiding a reputation for low pay is important, it says. Low pay can adversely affect recruitment but high wage bills will reduce profitability.

To achieve that balance, make comparisons of similar firms in your region and industry. Look in the ‘jobs’ section of local newspapers and compare similar positions; this is called ‘benchmarking’, and it will give you an idea of the ‘going rate’. However, remember that this is just a guide. You will need to try to match your employees’ rate of pay with their skills and the specific tasks they are performing.

Look at the whole pie

The term ‘total pay’ refers to more than just annual salaries. It includes employer’s national insurance contributions, pension packages, travel, meal allowances, subsidies and bonuses. It is worth taking these factors into account in order to avoid overspending on wage bills.

Be warned that if you pitch salaries at the wrong level, you could risk accusations of discrimination and face costly lawsuits in the future. Local governments have been undertaking Equal Pay Audits for years to protect themselves against claims of discrimination and many UK businesses are following suit. New discrimination laws demand that employers take the initiative to ensure that employees are not discriminated against. This means equal pay for work of equal value, regardless of sex, age, gender or race.

Pick a pay scheme

Payment schemes are usually considered to fall into two main categories, time-rated and incentive-based. Time-rated payment schemes give employees a set rate per hour, week or month or expressed as an annual salary, allowing for extra to be paid for overtime. They are simple to operate and tend to be cheaper to administer. However, as there is no correlation between pay and performance, employers really need to keep an eye on productivity to make sure that high performance is maintained.

Incentive-based payment schemes, in which employees might work for a commission or percentage of sales made, are good for encouraging hard work. However, they will inevitably be more complicated to administer and potentially more expensive to operate. You may find that a combination of the two will work best for you, giving your staff a basic rate and allowing for commission or bonuses if a certain level of performance is reached. This could act as an incentive for staff to work more efficiently.

Obey the law

As an employer you need to make sure that you comply with the regulations and laws pertaining to pay. For example, you are legally obliged to give each employee a written itemised pay statement at or before pay-day. You must also make sure that you comply with the current rules for the national minimum wage.

Have a look at the links set out below for more information about wages and the law, and remember that it might be worth seeking expert advice if you are unsure.

Useful links

For more SmallBusiness articles on pay and staff, click here and click here.

A guide to the national minimum wage is available to read here: www.gov.uk/national-minimum-wage-rates.

Various documents are available for download at the HM Revenues and Customs website, relating to tax and National Insurance Contributions (NICs). See their overall guide to tax available on the gov.uk website, click here.