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4 Best Methods for Determining Employee Compensation

Methods for Determining Employee Compensation

Setting Up Your Small Business Pay Grade System

If your small business has more than one employee and employees perform different functions you must consider setting up a pay grade system. Some states require this, there are federal laws that mandate the creation of a pay scale system, and the development of a pay scale for each job in your organization creates better employee relationships and improves performance.

What is a Pay Grade?

Pay grades are simple pay scales that represent increasing income depending on each employee’s or each type of employee’s education, experience, and length of service with your company. Structured pay grades help your business by defining pay that is fair and equitable for each person and type of work. Properly defined pay scales can prevent discrimination claims and can help you manage union relations if your employees are in a union.

Getting Started

The basic steps for defining pay scales are choosing a pay philosophy, defining the jobs, pricing the jobs, setting pay ranges, and implementing the pay scale program.

There are some basic pay scale philosophies and you can either opt for one of those or a combination of philosophies that you feel best fits your company and employees.

You can create a system that rewards performance with a base pay and bonuses based on well defined goals.

Pay scales can be based on skills. The skill system requires that you define each job skill and rank them in increasing order of importance and expertise. Pay increases are based on a given employee’s attainment of each skill level.

Pay scales can be based on traits. This is similar to a skill system. You must define the traits that make each job in your organization successful and then rank those traits in increasing order of importance. Employees receive increased pay as they attain increasing skill levels either through experience or education or both.

Pay scale bands are another basic pay grade system. Each type of job is defined by function not title. The pay range is defined for each group of employees that perform a similar function.

Define the Position

Your next task is defining each job in your organization. You must include a position title, primary job duties, other job duties that may be performed, training or education required for the job, experience needed for the job, supervisory responsibilities if any, and job responsibilities that directly affect your bottom line.

Price the Job

Pricing the job should involve employees to all extent possible. Supervisors and workers in the same functional area should be consulted as to the value of their work. Other resources you can use to create a fair and equitable pay scale are state and federal government publications that define pay scale for a given geographic area, pay scales in your industry, and pay scales for similarly sized companies.

Established Ranges

You are now ready to set pay scale ranges. Using all the information and planning that you have done previously, you are now ready to define the upper, lower, and mid points for pay scales for each job in your organization.


Implementation is a key to success using pay scales. You might consider a meeting with all employees to explain the pay scale program.

Recognition meetings with departments or all employees is very important in developing a good working relationship with your employees. If your employees trust you about pay – the most important part of their job – then they will perform at a higher level and your business and your employees can reap the rewards.

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