How Much Should I Pay My Employees?

The issue of how much employees get paid can be a bit of a tricky one for some small business owners. While in many cases, a human resource department will help navigate this particular terrain, for those smaller companies that may not have an HR department, coming up with an acceptable salary often involves some guesswork — not exactly an ideal scenario.

On one hand, you want to attract and consequently retain top talent; on the other, however, you do have a budget to keep in mind and adhering to this budget is important. Some experts suggest allocating employee salaries in terms of an overall percentage — as in 60% of your total revenue should go to employee pay. In theory, this may seem like a good solution to the employee salary conundrum, but every business is different, facing its own challenges and unique set of circumstances. Percentage-based employee compensation solutions might not work for some.

So what is the right solution? Given the location, cost of living and other such factors, how do Kansas City-based small business owners determine acceptable compensation rates for their employees? In this article, we cover some of the methods that you can use to establish your employees’ pay.

Come Up with a Total Compensation Budget

Prior to determining what you should be paying individual employees, you first want to evaluate your total compensation budget. That is to say, how much of your budget is allocated to payroll? When it comes to employee salaries it really is about a “big picture” approach that enables you to balance employee retention and promoting optimal productivity while being mindful of your budgetary capacity.

This is why creating a comprehensive budget that clearly shows what percentage of revenue you have available for employee compensation is so important and a key first step in determining how much you can afford to pay your employees. Generally, payroll is going to be the biggest expense that a business has. When taken in its entirety (to include benefits, health insurance, employee-related taxes, overtime, among other cost considerations), payroll can easily consume more than 50% of your total budget.

Your industry will also likely affect employee compensation rates. Landscaping companies for example will probably have a different pay scale than say a medical practice. Looking at other Kansas City businesses in the same industry or a closely related industry can certainly help you to gain greater insight into salaries typical for your region.

Related: Building an Effective Compensation Strategy in Uncertain Times >>

Evaluate the ROI of Each Position

As with any aspect of your small business, employee salary should be tied to ROI. If you are spending money on something, then obviously you want a measurable return on the money you are spending. If an employee (and their respective position) is not worth what they are being paid, then it stands to reason the funds would be better allocated toward something else. Your company would be well served by asking the following questions:

1. Is an employee saving you time? Time does equate to money. If a position or employee is freeing up time for you (or others in your organization), time that could be spent focusing on other tasks/jobs, then the money you are spending on salary here could definitely be worth it.
2. Does an employee impact other employees and subsequently elevate their ROI? In other words, are they a leader who motivates others to be more productive? This can be quite valuable when thinking about ROI and employee salaries.
3. Is this employee getting paid in accordance with their performance? Routinely evaluating a position/employee and ensuring that their performance is commensurate with their salary is an important part of ensuring that employee salaries make sense from an ROI standpoint.
4. What does it cost to onboard an employee in this role? Recruiting and onboarding can be costly—costlier than some small business owners anticipate. You want to make sure that the position is worth the expense.
5. What would it cost to replace this employee? Having a firm grasp on the overall cost of replacing someone can certainly give you insight into their worth in the context of salary and consequent ROI.

Related: Hiring at the Top of Your Salary Range? Here's Why It's Not a Good Idea >>

Consider the Individual Role

ROI is one aspect of evaluating employee pay. You also want to do a deep dive into the position itself.

The Job Role

Listing out the standards and requirements for a specific job can help you more effectively gauge what that position may be worth. For example, are there advanced skills needed? Does a job candidate need to be licensed? Are there special degrees/certifications required? What kind of hours are expected? These, among other relevant questions, will enable you to create a more detailed overall picture of the job that will lend itself to making some key calls regarding salary.

Average Pay in the Kansas City Area

There are numerous platforms and websites that can help you more efficiently determine where average salaries stand in regard to certain positions--many such platforms are location specific. Glass Door, PayScale, Salary.com and LinkedIn are helpful in this capacity. You might also reference locally based HR service providers such as Axcet HR Solutions that can custom-tailor reports geared toward your industry and region, thereby helping you understand what employee pay standards are relevant to your Kansas City business.

Candidate Expectations

Candidates will usually have expectations regarding salary specific to the position for which they are applying. Very often, when you are hiring, the job candidates you get will be those coming from another position who are looking to improve their compensation situation (though this is not always the case). This is why really taking the time to research pay rates in your region/industry is important. You want to make the position attractive to any potential hire and yet keep it financially feasible for the company.

Familiarize Yourself with Laws

Regardless of your compensation budget, candidate expectations and anticipated ROI, every employer needs to be familiar with all relevant laws as far as employee pay is concerned. If you are uncertain about federal/state and local Kansas City labor laws, then you need to consult with someone who has an in-depth understanding of these kinds of laws.

Some legal considerations when establishing employee compensation rates:

Exempt vs. Nonexempt

Federal laws dictate how a company pays exempt and non-exempt employees; understanding the differences and providing compensation in accordance with the rules is extremely important. Exempt employees are paid on a salaried basis, while non-exempt employees are paid on a salaried or hourly basis and are entitled to overtime pay.

Related - When Hourly Met Salary: Should You Switch Salaried, Exempt Employees to Hourly Pay? >>

Labor Laws

Currently set at $11.15, the Kansas City minimum wage for 2022 is higher than the federal minimum wage of $7.25. Any non-exempt employees must receive this amount in addition to time and a half for any hours worked over 40 in one workweek. As a small business owner, you must comply with all labor laws in regard to employee compensation otherwise you could face civil and criminal penalties.

Work with a Reliable Local Partner

For many small businesses, especially those without a dedicated HR department, establishing employee salaries can be confusing. Every company is unique, and every industry comes with its own set of standards where pay is concerned. Working with a trusted local HR solutions provider can help you avoid making costly mistakes and allow you to position yourself to attract some of the best talent that Kansas City has to offer. We would love the opportunity to consult with you regarding the HR and payroll solutions we provide.