How to Calculate Employee Wages and Set Salaries: The Complete Guide

how to calculate employee wages set salaries

Employee wages are an ever-present part of any business. It's a topic that many people don't like to think about directly, despite it being incredibly important for the wellbeing of your business and its workers. 

Many businesses end up valuing employees too highly and then losing out on profits. Meanwhile, others undervalue their staff and force them out the door as a result.

It must be understood that setting employee wages is a balancing act.

Once you've understood this fact, read on to find out how to calculate wages for your employees.

Step 1: Understand the Job

The first thing you need to do in setting employee wages is to understand the job you're asking them to fulfill in the first place.

Often it can be helpful to write the job description out first or create a list of responsibilities for the job role. An unspoken truth about job roles is that they are often very different despite being advertised under the same name.

A receptionist for a small business might predominantly be in charge of handling calls and not greeting staff. Whereas a receptionist in a hotel is more responsible for direct customer satisfaction and checking guests in and out.

You can't set the right salary for a job without first understanding what the job exactly is. Once you've outlined all the responsibilities of the job in question, you can start to properly figure out the appropriate salary.

Step 2: Set Your Budget

When looking to hire a new employee, you need to factor in how much money your business can allocate to this new employee. The best way to do this is to look at your end of year accounts, to see how much overall profit you'd be able to afford in hiring a new employee.

This is vital to budgeting properly and ensuring a new staff member won't break your bank. But it's also important to help you set an upper and lower limit.

Setting an upper and lower limit to your budget can help you to come up with the final figure for your salary. An upper limit is an absolute maximum you'd be willing to pay someone to fulfill the role.

Conversely, the lower limit is the lowest you feel you could respectably offer for the position in question. Some business owners advertise these upper and lower limits in the job advert itself.

This can be helpful as it then attracts potential applicants of different experience levels, which can create a broader pool of applicants to choose from.

Step 3: Research the Job Market for Average Employee Wages

The next thing to do after you've set your boundaries is to look at the boundaries set by the job market itself. 

Every job has an expected average salary rate, from entry-level to individuals with a lot of experience. If you're pitching your job wildly outside of this amount, you'll either get a lot of inexperienced people jumping at the chance to gain a much higher salary than they'd usually have access to, or your job simply won't get applied to by the people you're looking for.

It's likely that those looking for a job will also be researching these salaries.

This is why it's good to take a look at the overall job market before you set your salary. Find out what the average salary for this role in your geographical area is.

This can also help you to see how complex the job role is in comparison to others like it in the area which can also affect your final figure. The best way to conduct this research is to look at online job sites where jobs are advertised.

You're able to search for the job title as well as specify geographical area through most job board websites. Once you've conducted this research, you'll have a better idea of what other companies typically pay these employees as a salary.

It's also helpful when it comes to deciding how you will pay this new employee. Some companies pay by the hour, others as an annual sum. However, certain jobs come with expectations by applicants, which you need to bear in mind. For instance, a doctor likely wouldn't accept a job where they were paid by the hour.

Doing your research can help you decide this, and is the second to last step in the process.

Step 4: Think Flexibly

The final thing to bear in mind is to think flexibly in your salary listing. Think about all the many responsibilities that you're asking of this person or any future opportunities that could be open to them.

With setting salaries it is important to think about the dream person you'd want for this position. Then, create your salary based on what you think they would expect for the role.

Being flexible is dependent on your business position. If you're budgeting a bit more than you'd like to be, consider pitching slightly lower than what you imagine your dream person would want, but not so low that they'd be put off. Or, if you can afford it, offer the job as slightly higher pay.

If your employees are being paid more, they'll be happier and likely want to work harder for your business.

No matter what you choose to do, you'll need effective payroll services. Take a look at these online payroll services that can make paying your staff members a breeze.

Do What's Best For Your Business and the Employee

Overall, when it comes to employee wages, everything comes back to the balancing act we mentioned at the start. A salary needs to work for the business, but also work for the employee.

If you follow the above 4 steps, you should be in a position to properly put a price on that new job. As a final point, remember that a salary can always be increased later on. 

It can be good to factor pay rises into the initial figure, and to mention this to any prospective employees. You want your business to grow alongside those who work with you to make it a reality with competitive employee wages.

If you want to know more about the ins and outs of running a business beyond employee wages, make sure to take a look through some of the older posts on our website. Visit the HR and Career sections of the Frugal Finance Blog right now to learn more about employee wages and salaries.

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