How to Set a Base Salary: A Small Business Guide

It’s difficult to determine what base salary to offer employees at your company. This guide will help you properly research the right figure to attract the talent you want.

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No matter how cool a boss you are, or how much free coffee is in the break room, or how many bean bag chairs are scattered around the office, no one wants to work at your company. Trust me, if any of your employees won $10 million in the lottery, they would resign immediately.

And that’s OK. People work to make a living, and while they wouldn’t work if they didn’t have to, you can make your company a place people would be happy to choose over a competitor. The best way to do that isn’t by making it more “fun,” it’s by giving employees enough of what they are there for: money.

The base income you offer isn’t just a number — it’s something you should carefully research and discuss. A base pay that's too low will result in low-skilled employees and high turnover, but a salary that's too high will limit your ability to hire enough staff to get the job done.

So let’s talk about base salary, and how to come up with a figure that makes sense for your company.

Overview: What is base salary?

Base salary is the initial pay an employee receives that doesn't include extras like benefits, raises, or bonuses. Base salaries are essentially the employee's rate of compensation, which may be based on an annual, hourly, weekly, or monthly rate — although annually and hourly are the most common.

Base pay rate also generally refers to pretax income, so the actual take-home pay may be lower when taxes are deducted. It's essentially a fixed sum that the employee is guaranteed to receive if they work as agreed. Many people distinguish between salary vs. hourly, but for this discussion, we will consider all base pay.

How to determine base salary for your employees

So how do you know what base salary to set for your employees? Generally, it will vary depending on the position and experience, but you should follow these steps to determine what the optimal salary is to ensure good morale and employee retention at your company.

1. Do your homework

Most jobs have a well-established salary history, so if you're hiring for a fairly common position such as software engineer or HR administrator, it should be easy to determine what the standard salary is for that position.

Remember, a big factor that will affect the salary is where you're located — if you're a tech company in the heart of San Francisco, the cost of living in that area will force you to offer a higher salary than if, say, you operate a factory in rural Iowa. Use an online cost-of-living calculator to determine how much more — or less — to offer prospective employees.

If you’re hiring for an unusual or unique job where comparison to other jobs is difficult, just use your best judgment and try to be fair.

2. Determine what benefits you will offer

For full-time positions, you'll need to provide employee benefits, such as bonuses, health care, training, and more. Again, do your research to determine the standard in your industry.

This will affect the base salary for you rather than your employee. If, say, you offer an employee $65,000 annually plus health care and an annual holiday bonus, the employee's base salary is $65,000 but your base cost to support that salary and the benefits might $65,000 plus $6,000 for health care plus $2,000 for the bonus, for a total of $73,000.

3. Determine future raises

A big question you must answer is whether your company can afford to offer employees this salary — not just now, but in the future. Consider not just the current salary, but also how much you will pay in ensuing years, after you give employees a raise on a regular basis.

Consider what kind of raise schedule you must offer to maintain high employee retention, and think about how expensive those employees could become in a few years.

4. Settle on your base salary

Now that you understand what you can afford and what compensation the market demands for the job, it’s time to settle on your salary. Now, you must consider a few other factors:

  • Do I want someone who is experienced or entry-level?
  • Do I want to beat the competition to top talent?
  • Are there other external factors that will affect pay?

Once these questions are answered, you’ll be able to settle on a final base salary figure and budget accordingly.

Base salary example: A company in a mid-priced market is looking to poach the top software engineering talent to get an edge on the competition, and offers a base salary of $110,000, with a cost of $130,000 to the company.

They came to that figure by calculating the average salary for a software developer at about $90,000, which didn’t need adjustment due to location, since they are in an area with an average cost of living. But since they're trying to beat their competition to the best developers, they calculated they should add another $20,000 to the salary to make it worth their while for a base of $110,000.

After factoring in benefits such as health care, bonuses, and other perks, the cost to the company is $130,000 per year. Since they plan to offer 5% annual raises to their staff, the cost of that employee will rise to $135,500 the next year, $141,275 in the third year, and so on.

3 best practices when calculating base salary

Besides the steps above, here are three other things to consider before settling on a base salary.

1. Consider the work culture you're trying to build

Yes, the market may stipulate a certain salary, but will that result in the work culture you want, or just another workplace where employees come and go? If you're trying to build a work culture that makes employees want to stick around and even go above and beyond to grow the business, consider a different route.

Sure, it's great to provide snacks in the breakroom or the occasional office party, but ultimately your employees are in it for the same reason you are: the money. If you make it financially worth their while and show your employees respect, you've got the ingredients for a long-lasting team that will help you build to greatness.

2. Be transparent

A salary is not a static thing — not if you want to keep your employees. A salary should grow over time with raises and promotions. Be transparent with your employees about what kind of advancements are possible in your organization, and create a compensation structure that shows how they can take advantage of that. It will further motivate them by demonstrating that there's a future for them in your company.

3. Avoid discrimination

The typical attitude most companies have is to not tell employees what the annual base salary is and lowball them during the interview phase in the hopes they don’t negotiate, saving the company money. Today, when more people are placing a premium on equality and ethical behavior in the workplace, that might not be a wise choice.

A recent study from Glassdoor found white men were the most likely to ask for a raise, and there are many good reasons women and minorities are not as comfortable doing the same.

If you take the lowballing approach, you will likely end up paying white men more than the rest of your staff as a natural result. Would you be comfortable with that situation at your company? If not, consider offering a flat salary upfront to all employees rather than try to save a few bucks by making the prospective employee negotiate for more.

Software can help with salaries

Why do all the base wage calculations yourself? HR software will do a lot of the work for you, and a lot of other tasks such as handling payroll, managing company health insurance, and doing your accounting and taxes. By using software, you’ll be more organized as a company and be better able to track employee advancement and raises.

Your employees’ pay is not something that should be ignored once they’re hired — it must remain dynamic if you hope to retain those employees, so get organized with software and continue to monitor salaries to ensure maximum employee happiness.

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The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.