A. All employers, at some point or another, have had to make a decision on how to compensate their employees. Most employers want to be confident that they offer salaries high enough to attract and retain high-caliber candidates and most would agree that paying more for a quality employee is a worthwhile investment. However, companies often find it challenging to strike a balance between paying generously and not eroding the company’s profits. While there is no steadfast formula to determine employee pay, Joseph Kilmartin, Director of Compensation at Salary.com, shared his thoughts on what employers should consider when determining compensation rates.

According to Kilmartin employers need to look past compensation alone and focus on the total rewards the position offers, which includes salary plus bonuses, benefits, paid time off and other non-monetary incentives. Most employers assume that more money will keep employees happy when job satisfaction goes beyond compensation and shows a clear connection between the working environment, peer and supervisor relationships, and support. In Kilmartin’s experience most employees don’t leave a company based on salary alone. Rather, according to his data employees will only be prompted to leave their current position if they’re offered an increase of at least 10% and other incentives elsewhere.

Kilmartin recommends taking the following steps to determine the market value for your workforce:

1. Investigate online salary surveys – companies such as www.salary.com offer compensation data on thousands of jobs, scoped by industry, company size, and location. These databases are updated annually and adjusted on a monthly basis throughout the year to reflect current market rates.
2. Network with peer companies – other companies are also grappling with the issue of compensation. In order to maximize efficiency you can pool your resources with other organizations and sponsor customized salary surveys. While it may be tempting to share wage and salary rates directly with these companies you should be careful because it can result in federal restraint-of-trade charges.
3. Job postings and advertisements – some companies can find compensation rates by flipping through the job listings within the classified ads of a local paper, or perusing online recruiting sites.
4. Chamber of commerce – your local chamber of commerce will likely have salary information that is specific to your geographical location.

When deciding how much to offer your employees, Kilmartin points out a couple of other factors that come into play. Firstly, the type of position filled will dictate to a large extent the compensation rate. For example, for an unskilled labor position you may want to simply fill the job with little regard for the person’s skill set. For a highly skilled position, you may want to conduct the proper due diligence to make sure you find the most qualified person for the job which might mean paying a higher salary.

Another factor is determining how much your company can afford to pay. If your budget is tight, you can come up with creative ways to attract employees without necessarily paying them more. This can be done by offering employees fewer hours at the same pay, additional vacation time, flextime, commission and bonuses.

Current employees are also at the center of compensation issues. Determining raises and keeping up with the cost of living is a reality for all employers. According to Kilmartin, the average annual raise that employees will receive in 2006 is 3.7%. He emphasizes the importance of giving increases based on pay for performance, rather than just giving a cost-of-living adjustment. In the perfect world, exceptional workers would be rewarded with increases that are at least 5% more than those received by the average employee.

Kilmartin suggests evaluating your pay rates at a minimum of every other year to ensure that you’re competitive in the market. To make it manageable he recommends looking at 50% of jobs in year one and the remaining 50% of jobs in year two. However, if you’re experiencing extremely high turnover he advises reviewing the data more frequently.

Determining the right compensation package is an art, not a science. With years of experience you’ll be able to find the right balance that will enable you to attract and retain employees that provide value to your business and your customers.