How to Set Salaries to Be Competitive and Avoid Overpaying

by Granville Triumph

Nothing can cause conflict and tension in the workplace like discrepancies in salary.

“He’s getting paid what!?”
“I do twice as much work as her for the same amount of money!”
“Must be nice to collect a big check for sitting around all day and telling other people what to do!”

The executive pay gap in particular often makes headlines and becomes a political football. According to the Economic Policy Institute, the salary of an average CEO of a large U.S. company was 271 times higher than an average worker’s pay in 2016. The top 1 percent earned 87 times more than the bottom 50 percent, compared to a 27-to-1 ratio in 1980. Researchers suggest that executives are earning more because they have the power to set their own salaries.

After decades of activism and progress, the gender pay gap continues to be a real problem around the world. Although the gap has narrowed, especially among younger workers, American women were paid just 80 percent of what men were paid in 2016, according to the American Association of University Women. Some countries now require organizations to prove that men and women are paid equally.

When CEO pay is not even in the same universe as average workers, and women are paid significantly less than men for doing the same work, there are negative side effects. Pay gaps can be demoralizing. In this age of collaboration, pay gaps can destroy the sense of community and team mentality that are critical to business success.

Some companies are attempting to level the playing field by allowing employees to see and have a say in each other’s salaries. During the employee review process, each employee asks for feedback and a suggested pay increase from multiple employees. This amount is compared to industry data and run through a formula before a raise is awarded. Although this level of openness is rare, a high level of transparency keeps salary determinations fair and objective, and employee satisfaction high, according to organizations that have adopted this model.

Every organization needs a strategy for setting salaries that goes beyond crunching numbers. When employees ask why they are paid a certain amount, you need to have a rational explanation. The first step is to establish your compensation philosophy. Do you want to lead the market, match the market, or lag behind the market? Few companies set out to pay below-market salaries, a practice usually uncovered through market research. Just remember that you should never pay more than what a job is worth to your organization.

Analyze each job and document activities, responsibilities, importance and necessary qualifications. Through surveys, interviews and observation, you can compile this information and create an accurate, detailed job description. You may need to segment jobs into pay grades based on those job descriptions and other factors, such as location and working conditions. You can then can rank positions to determine not only their value to your company, but their relationships to each other.

Market research will tell you what other companies are paying employees with comparable responsibilities and value. Focus on job descriptions, not titles, which can vary significantly, and use data from multiple sources to ensure accuracy. Based on your internal and external research, create a salary range with a minimum, midpoint and maximum for each pay grade. Pay grade ranges tend to overlap, which allows for steady pay increases, promotions and flexibility.

Figuring out how much to pay your employees can be difficult, especially if you’ve never done it before. By taking a disciplined, strategic approach to setting salaries, you’ll compensate your employees fairly without overpaying.

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