Setting a salary at the right rate can be a balancing act – too low and no-one wants to work for you; too high and wages can consume company profits. Charles Cotton (CC), reward specialist at the Chartered Institute of Personnel and Development, tells Tom Whitney what small firms need to consider when setting salaries.

How do I set a salary for a new position?

CC: “Start by considering what value the individual would add to your business, and then work out what you can afford to pay them. But also look at national and local pay surveys to get a ballpark figure, and get word-of-mouth indications from within your industry. You can even get a good idea of what you should pay by monitoring salaries in job advertisements.”

What influences salary ranges?

CC: “An acceptable salary will vary in different parts of the country, and if there’s a skills shortage in your sector, that will affect what you should expect to pay. Market conditions play an important part, too – for example, if house prices and energy costs are going up and you don’t reflect this in what you pay, you may find staff going elsewhere.”

How do I work out if I am paying the right amount?

CC: “It’s about working out how much an individual adds to your organisation. This can be easier to quantify in some jobs, such as sales, than others. But ultimately they need to bring more to your business than it costs you to employ them.

“When people leave to go to another firm, it can be an opportunity to find out how much they are leaving for and see if your salary rates are competitive. You may even be able to offer that amount yourself and stop them from leaving.”

Once I have a salary range, how do I fine tune what I pay?

CC: “You need to make clear to recruits that whatever you offer is just a starting salary and subject to change later on. Most organisations will have a probationary period and if the recruit passes that, there could be a step up in salary. The initial base salary might be low, but if you tell employees what they can expect to earn in a year’s time if they do well, it’s good for their performance.”

Should I consider performance-related pay?

CC: “If you can accurately appraise staff performance, then this can be a good way to go. However, if you haven’t got the resources to match what other employers are paying, then consider other benefits such as extended holiday allowances or flexible working. These can help attract and retain staff.”