How to plan the perfect salary package for your employees

salary package employees
Compensation and benefits Employee Engagement

How to plan the perfect salary package for your employees

It might sound that it’s the same for every company, but my feeling is that especially for start-ups and SMEs, it is essential, and part of the business plan, that you motivate and retain your top talent.

If you read other articles on this blog, you might have learned that “small and medium organisations can usually not compete with the salary package that big organisations provide to their employees”. Of course, this is true. So on this article you will learn how to plan the perfect salary package for your employees.

Luckily, for your company it might be the case that the fight for talent is primarily won by what and how you do (by the company’s mission, purpose and vision), not by how much you pay. Nevertheless, you need to define the salary package that best suits your company profile.

Compensation and Rewards framework should be derived from the overall strategy, and aligned with the company’s values and culture. Decide if it’s better for you to pay for performance, or for collaboration, to pay for skills, or for ideas and how the employees experiment with them.

Your goal is to be competitive to other similar companies in the market, in the same or similar geography, with the same workforce size, within a comparable industry, or with who you are fighting for a very niche skill. To define a group of comparable companies consider where you want to get employees from, and also where you might lose them.

If it is difficult to pay more than big companies (and, as I was saying, it usually is) since they offer the brand, the status, job security, they have economy of scale for employees benefits, etc, think about other advantages that you can offer to compensate: office location, work environment, and working hours flexibility, vacation days (play with those, people love to have them), the community created around a common growth goal, and so on.

To understand your geographical labor market you need to ask yourself: are you based in a large city, and employ only there? Or do you hire regionally? Or even nationally? For this, the equation is quite simple: crowded areas and big cities mean more candidates, but higher salaries; while in remote areas, skills are scarcer, and salaries are lower; for the later, you could consider some sort of relocation package.

If you are not yet a large corporation, you should take advantage of your flexibility in what regards Compensation and Rewards. Aim for a very well defined compensation policy, with clear structures, starting salaries and capped salary levels only when your jobs are designed in such a way, when the internal way of working is flawless and strict, and the responsibilities for each role have perfectly delimited boundaries. Until then, keep your flexibility. Think about internal fairness, but don’t make it a blocker just because you cannot (or want to avoid to) justify to someone why they earn less. Remember, that compensation it’s derived from your strategy – do you say NO to potentially the biggest deal you might have done so far, just because it doesn’t fall into your scheme…?!

Make sure that well-paid employees are well-prepared experts, and then your return on investment will happen very fast. In a start-up, most often, the time to learn and develop on-the-job barely exists.

If you consider that is the right time to build an employer brand as well, think about communicating outside the organization exactly the things that you’re doing inside. Be as open as you can about your compensation policy (here are some brave examples). Usually this transparent approach builds trust, which leads to loyalty, which is essential in start-ups, when intellectual property protection is not 100% in place or when losing one employee means losing one tenth of your workforce.

And don’t forget that managing cost is an important aspect of your role, as a leader in an SME. So, as cynical as it might sound: don’t pay more than you know you can afford.

Setting the base salary for your team

  • Establish the levels based on some internally developed grading (depending on the number of unique roles, 6-12 levels should be enough. Look at the responsibilities of each job, at the experience and knowledge needed, at how much is needed to deal with ambiguity, and at the financial impact. You will see you will be able to rank, quite clearly, your jobs.
  • Establish your own salary ranges by using +/- 20% rule compared to an average salary for each job/ level. Use the sources you have, and make the best out of them. These could be: free surveys, studies (usually from consulting firms), or job posting sites, national statistics authorities, etc. PayScale, Glassdoor, or any local similar site are also very good sources of information. Seeing multiple candidates during the recruitment process usually gives you a good suggestion about the market expectations. Collect all these data, analyze it and compare.
  • If you want to invest some money in this, you could also consider consulting firms that can do one-time surveys for you, for roles that you specifically target, involving companies with the same profile as yours, from relevant geographical areas.
  • Don’t aim for the traditional salary surveys from the very beginning; since you don’t really have well defined jobs, these won’t do you much service. Use them when you feel you have created enough role diversity, and the jobs are more specific (as opposed to ‘everybody is doing everything’).

Annual Salary Reviews

In a world of constant feedback and continuous performance appraisals, whether the salary review should remain annual is a big question mark. Anyway, the suggestion for you would be to perform salary increases regularly, by checking how much you pay versus market evolution, candidates expectations, inflation rate or any other relevant macroeconomic indicator that is relevant. In this way you maintain your employees’ salaries at a competitive level and you don’t risk to face disparity between long tenure employees, and newcomers. 

Employees Benefits

  • Define some core benefits, that will help shape your company’s culture (based on your brand, on the products you’re selling). Then, complementary to those, let the employees choose what other benefits they want and need.
  • If flexibility is one concept that you would like to be part of your compensation philosophy, then flexible benefits are the way to do it. Especially if you have a very diverse workforce in terms of gender, life stages, age group, hobbies and interests, you will have difficulties in creating a benefits package suitable for all.
  • Flexible benefits platforms are very common and have positive feedback from the employees. They usually are able to provide a large portfolio of benefits, so your employees have many options. Alternatively, you could offer to cover expenses for various expenses related to: pets, sport and leisure, charity, etc.
  • The above mentioned type of platforms usually have the knowledge of managing taxation in the best possible way. If you keep your benefits inhouse, be aware of the local government subsidies and tax facilities. If these exist, all the major companies are offering them so they become a must in the labour market.
  • And, of course, don’t forget about health. This is one of the most desired benefits, and considering the current pandemic context, health related benefits appear to be imperative.
  • This blog has previously created an article with some inspiration on the employee benefit subject

Bonuses and variable pay

  • Small companies might not always be able to compete for high salaries. But, instead, they can offer shares, which have a potentially higher future impact than a monthly salary, and aim to attract specifically those people that truly believe in the future success of the business. This method of remuneration is commonly known as cliff vesting, and has also the benefit of giving ownership to employees, while creating a long-term relationship.
  • Use variable pay for what you want people to excel at. Pay for what is your differentiator, for that makes the business grow. But be careful with these risks:
    • Performance: too much internal competitiveness might sacrifice collaboration
    • Skill: an inflation of the same skill might be counter productive
    • Collaboration: focus too much on the internal work processes, and you might forget about your paying customer
  • Remember to seize the moment and celebrate every time there is this need: recognize people’s success on the spot (or as fast as possible).
  • In general, for variable pay the golden rule might be: to remunerate according to the frequency of the measurable results, and by how important (and direct) the impact is.

Watch-outs when designing bonuses and variable pay

  • If you have various forms of employment (regular employees, contractors, collaborators as freelancers) pay attention to what each of them earn. It might be natural to think about your cost, but to keep a certain internal fairness and comparability, you should understand the total compensation they each have.
  • Pay yourself decently, show that you believe in the potential of the company, and that you’re not looking for immediate earnings only; and, if necessary, in case of a crisis, pay yourself last. Be a leader.

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