To Which Factors Should Your Employees' Pay Be Tied?

Posted on: 22 December 2016

If you're a business owner who has recently noticed an uptick in the amount of personnel turnover you're experiencing, you may be concerned about this change and what it could mean for your business going forward. While there are ebbs and flows in just about every industry, a steadily increasing turnover rate could mean that there are issues with either your recruiting plan or your compensation structure. Read on to learn more about the factors you'll want to consider when deciding how to determine employee pay in a way that improves your retention rates and keeps your employees satisfied.

Where should the compensation process begin?

You may assume that your first step is to determine the maximum amount you're willing (or able) to pay a specific category of employee, and then begin your negotiations — however, there are a number of factors that you'll first want to use to determine a fair (and desirable) rate for each position. 

Your first step should be to research market rates for your region. There are a number of online websites that give average salary ranges for a variety of job duties and employer types, and you may be able to access more detailed or industry-specific information if you partner with a compensation consultant.

For example, if you're hiring entry-level workers to assemble parts on a production line, you may assume this type of entry-level job deserves entry-level pay; discovering that the average assembly-line worker in your part of the country earns nearly double minimum wage could go a long way toward explaining any recent negative trends in retention rates or the number of job applications received. 

On the other side of the coin, a market survey can lead you to the discovery you're overpaying for certain work. Not only can this harm your bottom line, it could impact your turnover rate if you tend to hire higher-level workers who are ready to move up quickly rather than spend years doing the same job. 

To what factors may you wish to tie your employees' pay rates?

Once you've determined a range of fair market rates for each job for which you're hiring, you'll want to put some thought into the metrics you'll use to determine each employee's rate of pay within this range. 

Recent surveys have shown that the majority of working Americans — more than 50 percent — are dissatisfied with their jobs or unhappy at work, and providing your employees with tangible metrics on which their pay raises and bonuses are based can give them a great way to feel invested in your business and ready to move forward. An employee who knows he or she is guaranteed a 5 percent end-of-year bonus for closing a certain number of cases or manufacturing a certain number of widgets is likely to work harder to achieve this goal than an employee who is unsure what factors are considered when setting his or her pay.

Some metrics you may be able to use when determining compensation for certain job categories or classes include the following:

  • Number of sales made
  • Number of in-person contacts made
  • Number or percentage of customers/clients retained since the beginning of the year
  • Average monthly amount lost to theft/shrinkage (particularly for workers in the security fields)

Because these data points are relatively objective and static, tying employee salaries and pay ranges to these factors is more likely to result in fair compensation for each of your employees. In addition, making this pay matrix accessible and easy to understand for your employees can go a long way toward helping them feel as though their contributions are equally valued.

Also consider working with consultants from a company like Fox Lawson & Associates, A Division of Gallagher Benefit Services Inc. to determine what other factors can affect compensation strategies.

Share