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Five ways you can determine a new employee's salary

Putting a price tag on a staff job can be a lot harder than pricing your company's products and services. Pay packages have so few rules. They go up and down depending on geography, industry conventions, seniority and the job market, as well as a candidate's background. The salary you set must be high enough to attract top applicants but not so high that it eats into your profits or survival.

And salaries are a bet over time. You invest today in the training, loyalty and productivity you hope to gain from the employee tomorrow. All in all, it can be a risky business. So how do you work out what a job is worth? Here's our five-step guide to figuring our what to pay a new employee.

Review your practices

Quote�The decision about salary comes down to how you value the job and what your company can afford.�End Quote

Don't wait until you find a candidate to come up with an offer. Do some homework beforehand.

"The biggest mistake business owners make is to react to what an individual wants before they know what they should be paying," says Bob Holden, vice president at Employco, a professional-employer organization that manages HR services for small businesses.

Get a handle on your past practices and precedents. Assuming you don't run afoul of employment or anti-discrimination law, the decision about salary comes down to assessing how you value the job and what your company can afford. You also need to keep the salary of new hires in line with what you pay current staffers.

"Go through a budget process," Holden suggests. Check how much you spent on payroll for the past year or two. Decide how the position you're filling fits into that overall percentage. You want to balance company payroll against the marketplace.

Define the job

Do this as clearly and completely as possible. You can't research a job's going rate unless you compare apples to apples. That is, you need a clear-cut job description. The job title isn't enough.

Quote�Job titles can be totally out of whack with salaries.�End Quote

"The worst thing you can do is compare job titles because they can be totally out of whack with salaries," says Elena Bottos, compensation consultant at Salary.com, an online research and services company.

Write a job description and then use that as your point of comparison for the marketplace. Sure, staffers at every small business do a dozen different things, but there are always key responsibilities. "Match the job to others by comparing the core functions," Bottos says.

Track the competition

Uncovering the competitive rate for a job takes detective work. To find what competitors or similar-size companies are paying for the job you have in mind:

Study classified ads. Check newspapers, trade magazines, professional journals or online job boards will give you an up-to-date overview of salaries. Look for jobs that are similar to the one you're offering.

Quiz professional contacts. Talking to officials at your local Chamber of Commerce or to other business owners will yield current salary data. Try joining a professional organisation in your field.

Pay for a customised survey. Many compensation consultants and market researchers sell salary surveys for specific fields or certain-sized companies. Ask around at industry conferences.

Set the salary range

Once you have an idea of the competitive rate, experts suggest you set parameters for the job - both a floor and a ceiling. That will keep you focused.

Quote�Everyone has a different opinion about the best time to mention the salary range to the candidate.�End Quote

But everyone has a different opinion about the best time to mention the salary range to the candidate. Some recommend asking a candidate how much he or she earned at the last job as a way to begin. Others suggest mentioning the salary range as a screening device, during the first interview or even phone conversations.

Still others think salary should be the last thing mentioned because you're better off getting to know the candidate's qualifications and skills first. It really depends what feels right for you.

Bundle pay and perks

Jobs are rarely only about money, although that may be what applicants mention first. These days, benefits and "quality of life" perks go a long way toward attracting talent and enriching compensation offers. Think about what other incentives you could offer.

Budget for the future

However you structure the salary, don't forget to think ahead. "You need to remember to leave room for raises and think about six months or a year down the road," says Jane Wesman, author of Dive Right In - The Sharks Won't Bite, a guide for women entrepreneurs. If your candidate is hired at the top of your pay scale, you'll have nowhere to go but off the charts.

When you're ready, put the offer in writing in an offer letter. Describe all the details and terms, including start date, pay package, benefits, vacations and so on. You might also include the special perks. That way, you avoid confusion or disagreements later on.

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What next?

Your staff may already be planning for their retirement. Read our essential information on pensions.

Is paying staff putting a strain on your cashflow? Here are some tips to keep the money moving.

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