This is a comment we have all heard. We may have even uttered it ourselves. Many people assume they would be making more if their employer simple paid them what they are worth. But an employee’s worth is not dictated by their employer or even by their personal performance. The market dictates what a job is worth. Every job from laborer to CEO has a maximum worth in the market.

Paying outside the range established by the market is wrought with problems.

Many small businesses struggle with compensation issues because they do not allow the dynamics of the marketplace to influence their decisions. They often let emotion, both positive and negative, to come into play. This can place them in a precarious position and at competitive disadvantage.

I have had clients tell me they like to be the highest paying employer in the industry in their respective area. They feel this ensures they can attract the best talent and have the most competent staff. This may seem sound on the surface. But on further review, this approach can have several flaws. Paying wages in excess of the what the market bears can make companies extremely uncompetitive especially when it comes to the labor component of their product or service pricing. Also paying excess wages does not ensure superior performance.

Others complain that their biggest problem is a lack of qualified labor in their area. But when you review the wages they are paying, they are well below the norm for the area; sometimes even below the minimum for the position. Paying below the wage scale for your area can become a self fulfilling prophecy. I pay below scale and therefore have high turnover and therefore have trouble hiring quality employees because I pay below the scale. Remember, you get what you pay for. Paying lower than the general accepted wages, mostly likely means you are attracting the bottom of the talent pool. Trying to control costs by paying low wages can often backfire. You may incur additional costs by constantly paying to acquire new employees and revenue can be diminished because of quality issues related to the competency of the employees you are hiring

Other considerations used in making pay scale or wage decisions are:

Experience - Paying higher wages based on experience has its benefits and its issues. You definitely want to hire employees that have the requisite skills and work experience to perform the job you have available, But at some point experience cease to be a qualifier. I often hear I have to pay him/her more because he/she has ten years experience. What does that mean? Does 10 years of performing the same task or duties add to a a persons qualifications? Often it does not. 10 years of experience may really mean 1 year of same experience utilized over 10 years. The additional nine years performing the function adds little to the contribution the individual is likely to make.

Loyalty - I am often told by clients they pay their employees more (at least some) because they have been with the company from the beginning and they want to reward that loyalty. But is that loyalty genuine and to what are they loyal? If wages have been above the norm during their employment, these employees' loyalty may be to the "almighty buck". They have stuck around not for some altruistic reason, but simple because they couldn't get paid nearly as much by anyone else. Has the additional wages paid increase their contribution over the years.

If you don't have established pay scales for each position, you really need to develop them.

There are several web based resources available for you to use in establishing your pay scales. Most of these are geared to employees seeking employment but are also useful to employers. Typically, these sites will give you a pay range for a specific position. The range may be for the specific city in which you are located. For some positions pay ranges are only available by state or region. Most of these sites will also give you a brief description of the position. You want to make sure that position description is similar in to the job for which you are developing a scale

Once you have located the correct position, chart the wages you are paying your employees against the wage scale you have located. You want your average wages for the position to be around the mid-point. For example, if the pay range for the position has a minimum of $12 and a maximum of $18/hr with a mean of $15 and you are paying $14.50/hr on average, you are in good shape. If you are paying anyone less than $12/hr, you need to increase their wages. If you are paying more than $18/hr you may want to think twice before you give the next raise.

(Raises and rewarding performance will be addressed in a future hub)

You should conduct a similar review each year to ensure you are still within the range.

By establishing and maintaining pay scales that are based on accepted ranges in your geographic market, you WILL be paying employees what they are worth as determined by the market.