How to Set Your Employees’ Salaries (Tips)

To avoid employees from leaving your company (i.e. a high turnover), you need to pay your employees what they’re worth. In a previous article we talked about how to define the % of revenue to allocate to payroll. In this article we will learn four steps of developing a correct compensation policy.

To create an environment in which employees are paid correctly, there are four questions that you always need to answer:

  1. Am I paying all my employees equally regarding their job?
  2. Am I paying my employees correctly regarding their job description?
  3. Am I paying my employees for their contributions to the company?
  4. How am I’m going to pay my workers in the future?

Question 1: Internal Consistency

To find an answer to the question regarding internal consistency you need to start by analyzing the jobs. Job analysis is the first step in creating an equal payment system. To analyze your jobs you need to talk with your employees about what they do.

The best way to start this analysis is by using a questionnaire or by interviewing them. Using this information you can document it in a job description. Once you have got all of the different job descriptions, you will need to analyze them and put a hierarchy together to create the job structure.

To summarize:

  1. Find out which different jobs there are in your company
  2. Create a questionnaire and interview your employees
  3. Create job descriptions
  4. Put a hierarchy together

Question 2: External Competitiveness

Once you’ve analyzed your organization; it is time to define your market. Defining your market means that you will be analyzing where you gain people from, where you recruit people from, and where you lose people to.

Once you’ve defined your market, we recommend participating in salary surveys (for example: through within your industry or geographic location. Once you’ve done that, you will need to put together policy lines and build a page structure, which is a series of salary ranges with a minimum, midpoint, and a maximum.

To summarize:

  1. Analyze your market
  2. Participate in salary surveys
  3. Put together policy lines and page structure

Question 3: Employee Contributions

The third topic that you need to tackle is the employee contributions within the organization. This means that you will need to review the performance and the results of your employees. And evaluating that information against the objectives stated in your performance management system. Those metrics could be performance-based or may imply seniority.

You can also use merit guidelines to distribute the pay increases versus their results and where they’re paid and their salary ranges. You want to utilize incentive plans, like short-term incentive plans, long-term incentive plans, and bonus plans to reward people’s results for the objectives that they’ve achieved.

To summarize:

  1. Define metrics of contribution
  2. Link this to a compensation system

Question 4: Pay System

The fourth topic that you will need to handle is salary planning. This means that you will plan out how people are going to be paid over the next year, and implies salary budgeting. Look at what’s going on in the external marketplace and decide how much you’re willing to spend. Then you’ll want to communicate openly to employees how you’re taking care of your whole pay system.

To summarize:

  1. Define a salary budget on a longtime run
  2. Communicate this to your employees


After a while, you should evaluate your entire program. How has your turnover evolved? Are your employees happy? What could improve? Review every component and decide if it’s working for you.

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