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2014-08-27 00:00:00Money & FinanceEnglishoverpaying your employees: Deciding on employee salaries is one of the most challenging aspects of running a business. you overpaying your employees?

Are you overpaying your employees?

3 min read

Deciding on employee salaries is one of the most challenging aspects of running a business – you want to ensure you compensate them according to industry standards to attract the best talent but you also need to keep your resources in mind.

In addition, pay variance across the employee set is another concern. Here are certain points to keep in mind while you evaluate your current salary strategy for employees:

1. Match the job and the position:

In case an employee’s salary is above the median or industry standard, it is possible you may not have matched the job to the most appropriate position in the market salary data.

Check the job description and compare it with the actual responsibilities involved and figure out whether that employee’s job involves all of them. This way you will be able to understand where that employee stands in terms of salary.

2. Decide on a fair amount:

There are many factors to be kept in mind while evaluating what salary you could provide. Compare the cost of living in your company’s location with others in the industry in terms of cost of living expenses.

Consider the size of your company and the resources it can afford. Finally also base your pay on what competitors in your industry offer, so you make a fair offer when you hire someone.

3. High salaries could lead to a sense of entitlement:

Your employees could feel they are entitled, and may also encourage them to assume that you owe it to them, every year or quarter, regardless of whether their contributions were worth it. In addition, it could also discourage them from working hard, since they have already been rewarded.

Therefore, it would be wise to use discretion both when bringing a new employee in as well as in providing bonuses when it comes to salaries.

4. Don’t spread your resources unevenly:

Managing your cash flows is vital for any business, and spending too much in one area could cause issues in another. For example if you pay two or three employees a lot more, it could later affect your ability to reward another employee for their performance through a hike, or affect your investments in other areas.

5. It could lead to a talent crunch:

Employees who are paid significantly more tend to stay on in the same role for longer, taking away opportunity from brighter, more talented people who could have the same responsibilities and cost your company less.

In addition, staying in a role just because of being paid over market rates could make these employees lazy or complacent and affect your turnover.

6. Too many differences could lead to conflict:

Two employees with the same role and function should not ideally have too much of a difference in salary. If one employee finds out that another similarly qualified and experienced employee is receiving a much higher pay than he is, it could lead to unnecessary conflicts.

Most of the time companies attract talent by offering higher salaries, but even if that was the case, the other employee would not feel like he/she has been fairly compensated. It may also lead that employee to start doubting the company on the grounds of being discriminatory to their social standing, gender or any other factor.

There are plenty of factors that go into deciding on an employee’s salary. Keeping track of industry standards and trends will go a long way in helping you make an informed decision.

Secondly, ensure that you consider raises based first and foremost on performance and then on any cost of living hikes. Lowering a salary after it has already been fixed is not the ideal situation – instead you could use more prudence when the next appraisal comes around. Finally you could also consider offering part of the salary as a performance-based bonus for better motivation and results for your company.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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