How Much Should I Pay My Employees?

If you ask this question to most business owners, let’s be honest – the real question is: how low can I pay my employees and get away with it.  I understand why this is the case.  I’m a business owner too.  After all, it’s your own hard-earned money that you are giving to someone else.   You also can’t guarantee how much more there will be coming through the door.  But then again, you’re a business owner.  You took a risk in the first place by deciding not to work for someone else.  So there are no guarantees anyway.  What you can guarantee though is that money does matter for most people.

Here is my advice for small to medium business owners and managers wondering about what they should consider when determining what they should be paying their employees.

Minimum Wage for Modern Award Defined by Fair Work Australia

Ok so let’s start with the basics: you need to pay at least the rate that is in the relevant modern award (and most employees are covered by one, with the main exception being senior managers at a certain salary level).  You can find the relevant modern award by looking it up on the Fair Work Australia website. But legislation aside, what is the correct rate all things considered?

Australian Pay Rates

The first thing to consider is the market rate for the position.  You could pay thousands for a remuneration company to perform a detailed benchmark or you can look up a few places yourself.   Many recruitment agencies provide salary surveys – hey are only general guides, but are still a good starting place.  You can also look at the job boards to see what others are advertising at.  However, bear in mind the salary is not always shown and you don’t know what they will actually pay the person after negotiations.  A good website that provides some free information is Payscale, where you can just type in Google the job title and payscale and it will take you to the relevant page.  If you check out Insight by Seek, this can be a great source of information as well.

Ok so once you have the market rate data, should you simply pay at the median (the midpoint of all people in that role)?  Should you pay below that?  How about paying at the top of the market to get the best person?  Unfortunately, it is not always as easy as that.  There are many highly paid people who aren’t really that good.  There are others who will take less money but are top performers.  You should really consider though how competitive the market is compared to the level of talent out there.

Reward and Recognition Programs

One very important factor to take into consideration, are all the other aspects of reward. When I mention reward, we are talking about both monetary and non-monetary.  For sales people, it is a different kettle of fish altogether and I will cover that in my next blog post. Let’s talk generally for the moment. A key question here is: what is the type of person you want to attract and retain?

Do You Really Want to Use Money as a Motivator for Employees?

Different people have different needs.  It is easy to simply think that all people want more money.  That might be what some people want, but it isn’t what all people want.  Let me make a statement that is so true but never quite understood by most managers: Money is primarily a de-motivator, as opposed to being a motivator.  That is, if I feel I am being substantially underpaid, then this is demotivating, disengaging and a distraction.  If you pay me more than what I should be getting, this doesn’t really motivate me any more.  It may give me a slight bump for a short period, but then things go back to normal.  Maybe talk about here – if you pay me what I feel I’m worth then highly engaged, proud, striving for success etc,

Generally speaking, you do usually need to pay more to get someone with more experience or who has held more senior positions.  You need to be careful though  not to hire a person who is far too senior for the role.

Industry / Competitive Analysis

The safest bet is to pay at around the market median, with a little bit of flexibility based on your candidates’ experience.  Bear in mind though that in a highly competitive market with scarce skills, the market median is probably higher than what you think it is.  You should also be transparent and objective with your people as to how and when pay rises take place.  Once you have done so and are managing things consistently, money is less likely to be a de-motivator.  

Employee Retention

You should then focus on all the other aspects of your business that make it attractive for people to join and to stay.  

  • What is the culture like?
  • What other benefits can you provide?
  • What personal and career development can you provide?
  • What about workplace flexibility?

In the end, people pay money to be happy and achieve their goals. If you are helping them do that through working with you, then that is worth more than a few extra bucks.

Consider the Positive Impact of Successful Performance Management

One final point in all of this – which I think is really important to remember – pay and rewards are important, but as long as they are reasonably well-managed, they are not the differentiating factor in terms of business performance.  What is more important is attracting, selecting, developing and retaining the right people in the right roles – especially for your pivotal roles.  If you do this, give them a clear purpose and direction, whilst focusing on being a good leader yourself – this is what will build your business.


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