Here’s the Formula You Need to Pick the Perfect Salary for New Employees

Gusto Editors

Let’s stop the salary seesawing once and for all. As an employer, deciding on a salary for new employees is no easy game to play. That daunting number is made up of so many different odds ‘n ends, it’s hard to choose just one mixture of digits to embody them all. Here you want to attract incredible people, treat them well, and make sure they stay with you. But at the same time, you also have a bottom line to think about. Overpaying means you have less money for other business expenses, while underpaying puts you at risk of losing people because you’re not showing how much you value them.

To settle on a number that’s fair for everyone, you first need to get the lay of the land so you can guide yourself toward a number you can feel good about showing your new employee.

Get your job description down

First, make sure you have a solid job description that details what the role actually entails. For many small businesses, this can be a struggle since the descriptions can turn into a garage of to-dos the company needs to get done. Tighten the description by accurately representing the main tasks, but at the same time, tasks that are also aligned to real roles other companies have. That way, you can use it to guide your journey into salary research.

Take the emotion out of the equation

When employers set wages without doing research, it’s never fun. Almost 35 percent of people who switch jobs left their previous companies because they weren’t satisfied with their compensation packages. Beyond being a practical matter, an employee’s salary is also deeply emotional when folks start comparing themselves to how much their peers make.

A survey by PayScale found that people’s perception of what they’re paid matters more than the actual amount they receive. In other words, even if someone earns an amount that’s lower than they want, as long as they know the reason why that’s the case, they’re more likely to say they’re satisfied with their roles. That’s why it’s so key to not only do a bunch of research upfront, but also use it to help you explain to employees why you selected that number. For example, if you offer higher equity instead of higher salaries, communicating that point is essential for employees to know.

Figure out your salary model

Salaries can be based on either the job at hand or the person you’re hiring. Here’s what we mean:

  • Job-based pay is defined by the job’s duties, and then adjusted to fit other factors like education or a person’s seniority.
  • Person-based pay (also referred to as skill-based pay) focuses more on the skills, competencies, and achievements of an individual. For instance, you may start someone with a base salary, and then reward them as they gain targeted skills or core competencies needed to thrive in their roles.

Job-based pay is the most typical approach companies take, but as you jump into research mode, you may find that person-based models are becoming more common in your industry or niche.

Crunch the numbers

Once you understand the two types of salary models, you’ll need to start looking at some actual numbers. By exploring the going rate for the position you’re hiring for, it’ll help you set a realistic baseline. Get started by clicking through the resources below:

Find out what other businesses are paying

Here’s a salary comparison tool that uses data from the Department of Labor (DOL) to show the average salaries for different positions in every state. You can also scan sites like and Glassdoor to find basic comparative data, or work with a consultant to unearth richer insights.

Check industry standards

Professional organizations often survey their members, which may include information about salaries and other benefits.

Ask other business owners

Your closest competitor may not be willing to tell all, but industry groups, local business organizations like SCORE, and your network can be helpful places to tap.

Be sure to account for regional differences

The cost of living and market demands between San Francisco and Atlanta are like night and day (or like tacos and peaches). Once you have some example numbers to work with, use a cost of living calculator to figure out what would be appropriate in your area.

Check out some unconventional examples

Buffer is a leader in the transparent salary movement, even going so far as to publish the salaries of all their employees. While the actual numbers may not be helpful, the way they came up with their formula is an interesting topic to read about while you’re in the salary mindset.

Got a good grasp of the number? Excellent. Just don’t forget to account for any legal, state, or union requirements you may need to follow. To keep your bases covered, connect with an HR consultant or specialized recruiter for tailored support. Spending a few extra dollars here can help you avoid some potentially prickly situations down the road.

Don’t forget the rest of your package

Pay doesn’t always grab the top spot when it comes to people’s priorities. Gallup found that younger employees see opportunities to learn and advance as even more important than salary in the grand scheme of things. Not to mention, benefits like health insurance and work flexibility are also big considerations candidates juggle when deciding whether to join a company.

A survey from Glassdoor highlighted the benefits and perks that actually ranked higher than pay raises. These things include:

  • Health insurance (e.g., medical, dental)
  • PTO
  • Performance bonuses
  • Paid sick days
  • 401(k) plan, retirement plan and/or pension
  • Flexible schedules

Get comfy with the number you pick

Sometimes, a candidate will accept the salary you propose. And some will come back to you with a higher number. Don’t freak out. If the number is in your range, it’s usually best to accept it so you don’t lose out on a great candidate. And luckily, that’s why you did so much research in the first place.

Now that you know how to find your way out of the salary maze, picking one won’t feel like you’re randomly choosing it out of thin air. A thoughtful, research-based approach will help you land on a number that’s fair, competitive, and that your employees can’t help but get pumped about.

Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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