Shop Talk

Ask the Experts: Create an equitable salary structure

Ann Close
Ann Close

For even the most savvy small-business owners, salary administration can be a tricky minefield. Owners juggle many balls, and human resources is often not one of them. But if they want to expand their business, they eventually need to hire employees.

Hiring, managing and paying employees doesn’t have to be complicated, said Ann Close, owner of Close HR Connections in Raleigh. Larger companies have many steps in their salary administration, but small businesses can keep it simple.

Here are Close’s ideas for establishing and administering a salary plan.

Determine hiring salaries: Create a salary range, starting with new, entry-level employees with no experience. Then set an intermediate salary for employees who have a couple of years of experience, and a salary for senior-level employees. The spread should be around 30 percent. For help, turn to resources such as an industry trade association, business peers, chambers of commerce and the Small Business Administration.

Decide how much revenue should go toward salaries: The ratio of salaries to a company’s gross revenue depends on the owner and the nature of the business. Usually 25 to 35 percent of gross revenue goes to pay salaries, benefits and taxes. The service industry often reaches close to 50 percent.

Fairly administer salaries: Keep salary structures equitable by basing them on measurable criteria, such as skills, knowledge, education and performance.

Set a schedule for giving raises: Award raises based on job performance. Use six-month reviews, which are better than annual reviews, as a communication tool and an opportunity to determine annual salary increases.

Small incentive bonuses can be given if an employee completes a project or performs above expectations.

When and how to cut pay: Pay cuts should be a last resort. Companies need to retain employees to stay in business, so before cutting salaries, bring everyone together to brainstorm how to reduce company expenses. People become inventive in those situations. If salaries must be cut, don’t cut more than 10 percent. Tell employees the cuts are temporary and follow through by bringing back their salaries as soon as possible.