By using our website, you are consenting to our use of cookies, as described in our privacy policy.
You can change your cookie settings at any time.

mobile menu

< Back to resources


The importance of calculating competitive salaries

October 04, 2018

Compensation is often an uncomfortable and difficult part of hiring conversations, yet salary plays a critical role in determining whether or not an employee will join your company—and remain there. In a recent SHRM study, 61 percent of employees ranked compensation as a "very important" contributor to job satisfaction. In order to attract and retain the talent you want, it's important to offer a competitive salary.

HR managers not only have to be able to make the right offer when hiring a new team member, but they also need to continue to evaluate employee salaries to ensure they are making an amount commensurate with experience, tenure and workload.

Aside from work experience and skills, there are many factors involved in calculating salary including market rates, company budget, and employee satisfaction. Here's what organizations need to know about calculating salary and how to determine the right salary for your workers.

The Role of Salary in Employee Happiness

Employee happiness goes a long way towards improving the bottom line—happy employees have been shown to be up to 20 percent more productive than unhappy employees. While compensation isn't the sole factor that determines work satisfaction, it certainly helps.

In order to ensure salary satisfaction, it is important to clearly communicate pay structure to candidates and current employees, but according to a PayScale study, only 10 percent of organizations are confident in their managers' abilities to explain the rationale behind pay decisions. This is problematic—employees need to know why they are being paid or offered a certain amount.

To create an effective communication plan, ensure that your HR department has a policy in place for how to discuss raises, bonuses and salaries with existing employees and new hires. Employees want to feel professionally valued, and when a manager is able to clearly communicate compensation decisions, salary becomes more meaningful.

The Cost of Not Offering a Competitive Salary

There are many consequences that can be attributed to compensation levels that fall below the market rate including higher turnover, lower morale and decreased output.

The number one reason employees look for new positions outside of their company is for a higher salary: only 21 percent of employees feel that they are paid fairly and 56 percent of employees leave their current company due to what they deem to be inadequate compensation. This is bad news for employers, since it can cost a company more than double that worker's annual salary to re-fill the position.

Low compensation rates may also be the reason organizations struggle to fill open positions. The longer a position remains open, the more it costs to fill it. Recruiters and hiring managers must put in more hours, output may decrease if project timelines suffer and morale can decline if employees have to work more to compensate for a vacant role.

At the end of the day, companies want to attract, retain and motivate the best talent. Competitive salaries attract top workers and encourage them to stick around for the long term. If competitive salaries are out of reach, organizations can compensate by providing other benefits such as flexible work hours, more vacation time or professional development opportunities.

How to Calculate Salary

Calculating salary is not an easy task; it's important to offer enough to attract top talent, but to not overpay. To start, make sure detailed job descriptions exist for every employee, from entry-level staff to high-level executives.

Next, conduct research to determine the average industry pay for each position. Today, there are a variety of online resources such as Glassdoor that prospective candidates can access to learn how much they should be paid given their experience level, job title and geographic location. Organizations must conduct this same research so they can be prepared for the salary that qualified candidates will seek. This research will be the basis for creating salary scales, the low- and high-end pay for each position.

Competitive compensation means that salaries are at or above market value, and candidates will expect to receive market rate pay unless they are offered other valuable benefits. Keep this in mind when creating salary scales for job positions and make sure that scales fall within operating costs. If applicable, account for bonuses and commissions as well.

Salary can be a big factor for candidates when deciding whether or not to take a job. While competitive compensation is certainly a good place to start, also be sure to evaluate each candidate for their own merit. Remember, people are your greatest asset—rather than seeing employees as just another expense, think of salary as a way to attract the best workers in your industry and invest in loyal team members.

Looking for a better way to view and track compensation metrics? Cornerstone HR and Cornerstone Performance allow you to visualize cost impacts, proactively identify talent gaps, and automate benchmarking to achieve better business results.

Complete the form to access the resource. You will also get instant access to all of our other resources.

Share This Story


Take us for a spin

get started


PrivacyCookiesTerms of Use
©Cornerstone 2020