Employee Management

Employee compensation tips

Salary or hourly? And how much is enough? Determine employee compensation for your small business.

Published: July 22, 2015
Updated: April 11, 2017

Attracting quality employees while controlling expenses may seem tricky, but offering competitive employee compensation can reduce turnover and the cost of training new employees. Before hiring, create a solid compensation plan with these tips.

Ensure you have the budget for employee compensation

Plan for employee compensation like any other expense. Establish a realistic budget by analyzing your finances and considering the roles of your staff.

"What is your budget for staffing? How many employees do you need to run your business? Is this a 24/7 business requiring weekend, holiday, or evening shifts?" says Fred R. Cooper, founder and managing partner of Compass HR Consulting in Tempe, Arizona. "Once your organization's focus and structure is determined, then a compensation philosophy with actual dollar costs can be developed."

Compensation costs can include salaries, bonuses, benefits, retirement contributions, and payroll expenses. If you don't think you can pay competitive salaries, hold off on hiring for six months, then re-evaluate what you can afford.

Determine whether your employees should be compensated hourly or salaried

You have hiring power as a business owner, but you can't arbitrarily assign positions as salaried or hourly. The Department of Labor (DOL) and the Fair Labor Standards Act (FLSA) regulate employee classifications and exemptions.

"The DOL has definitions for what kind of work, assignments, tasks, and responsibilities qualify for an individual or position to be considered salaried [exempt from overtime] or hourly [non-exempt from overtime]," says Cooper. "Treating a non-exempt individual or class of positions as exempt/salaried to avoid paying overtime can lead to significant fines and payments of lost wages."

Employees are typically salaried and exempt from overtime if they're paid more than $455 per week, though proposed overtime regulations aim to nearly double this amount.1 Hourly employees make less but are eligible for overtime pay.

"The obvious drawback to having a workforce of mainly hourly employees is the overtime liability," says Amy Gulati, a Senior HR Manager based in Washington, D.C. "You can manage this through careful scheduling and policies that require overtime be approved in advance. That being said, many businesses get into trouble because they fail to pay unapproved overtime." Avoid penalties by classifying positions correctly and complying with FLSA minimum wage laws, overtime regulations, and exemptions.

Stay competitive with your employee compensation

Get an idea of the going rate before deciding how much to pay employees, ensuring you don't overpay and lose money, or underpay and lose talent.

  • Research average compensation and comparable job listings. Check out resources like salary.com, indeed.com, glassdoor.com, salarylist.com, payscale.com, and the Labor and Worklife Program. For comparisons, use job listings with similar responsibilities, industries, and locations. Keep in mind that a social media manager at a large marketing firm, for example, will likely have a larger salary and different responsibilities than one at a small business.

  • Establish a pay range. Advertise the position with a salary range (e.g., $30,000 to $40,000, commensurate with experience). Once you begin interviewing, you'll see if there are any highly skilled applicants worth the high end.

  • Provide alternative benefits. Jobseekers are also motivated by benefits, bonuses, paid vacation, and great working environments. If you can't offer top-tier salaries, consider other ways to compensate.

Adjust employee compensation accordingly

Revisit compensation policies at least every two years to remain market competitive and internally equitable in determining salary ranges and pay practices, says Cooper.

"Critical points, like hiring an employee or seeing an employee leave, are good times to briefly review your compensation levels," says Kenny Kline, founder and CEO of slumbersage.com. "I increased compensation for the entire staff at one point during a review because I felt like we were not competitive enough to retain our top talent."


1 "Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)." U.S. Department of Labor Wage and Hour Division. (2008) http://www.dol.gov/whd/overtime/fs17g_salary.pdf