How the heck do you figure out how much to pay employees?

how much to pay employees

How do you determine a fair value for work performed? Websites like Glassdoor use anonymously added salary info and review to help prospective employees figure out how much they should be paid, but the focus naturally settles on bigger companies in more mature markets (presumably because there are more employees at bigger companies and more competition among this companies for talent).

What about small business in a global, digital economy? How do you figure out what you should pay and what work is worth?

Disclaimer: This isn't a guide

There's a lot to consider when determining employee pay. NerdWallet's comprehensive guide to paying employees is a fantastic resource for nearly everything you need to address, but it still leaves me wondering what makes pay fair.

This post is not a guide. It's my ramble on value, which is an often overlooked and undercooked part of compensation decisions. As with the NerdWallet guide, most salary and compensation guides focus on average rates and technical requirements. This is a reflection on measuring the value exchanged, not necessarily in dollar amounts.

Why we hire

We hire for lots of reasons. We're growing and need extra hands to deliver value to our customers. We've run out of time to get our work done and need someone to carry some of the load. We've moved from owner/worker to manager and need help with administrative tasks.

Whatever the reason, we hire to enable our business to deliver more value to customers and extract more value in return.

A fair exchange of value

What I believe we're looking for when hiring is a fair exchange of value. We offer an employee, a contractor, a freelancer money in return for their time and intelligence and work.

  • An employee expects to be paid "what they're worth" and plus or minus what other people earn in similar roles. To distinguish between employees and project-based help, and for the sake of argument:
  • Contractor rates vary, but often charge more because they don't receive benefits and, for sake of distinction here, they tend to work on larger projects.
  • Freelancers take on smaller project-based roles and their rates vary depending on skill and precedence*.

Given the many ways to hire someone, what's the best way to determine a fair exchange of value?

It's easy to quantify some projects. For example, if an account manager spends five hours per week manually building reports and you know a well-developed script could do most of that work for you, it's simple math. The script only has to cost less than 240 hours of your account manager's time (roughly one year of building reports) to be worth it.

Not all projects are straightforward and value can be a pain to figure out. Hiring a business coach is an example of this. I believe the right coach can deliver enormous value, but coaching isn't always quantifiable and results aren't always directly attributable to profit and loss.

What's the math on hiring a coach? It's not always obvious and I think that's why you have to set objectives. Objectives are important for more than just determining if you're paying someone fairly. They're important for measuring progress towards longer term business goals.

Whether you're hiring a coach, a window washer, a CFO, or an entry-level marketer, setting objectives is the best way I know of to determine the value being exchanged.

*What do I mean by precedence? Simply put, it's their most recent rates based on a growing body of work and a growing list of positive reviews.

How to find fair value

I've done probationary periods, short-term contracts, and test projects to find good people to work with. Not everyone works out and if at the end of a test period I see it's not a good fit, we'll part ways.

What I've never done is think about how to understand what someone's time, energy, and output has been worth to me and my business. I haven't set objectives until well after initial test projects, which means that I was offering pay rates and packages based on nothing more than what I thought I should pay (see Glassdoor).

Is it more fair to start each test period by setting employee objectives with clear plans to measure performance and value? Perhaps setting objectives is step one of any test period. And perhaps I should ask the person I'm hiring to set objectives for me, too. This is like asking each other: What do I need to provide to you for a fair exchange of value?

If we start our working relationship based on clear, measurable objectives, the decision will be obvious at the end of the term. We either hit our marks or we don't. And if we don't, we both have a something specific to measure our performance on (as hirer and hiree) to see if there's room for improvement or if we're not a good fit.

We all want to be enthusiastic about working together

According to Glassdoor, salary is a top factor for 67% of job hunters when considering whether or not to take a job. Money matters.

But other things matter too when we work with others. Do we get along? Are we doing good work? Do we share a mission and vision of the future together? What was my first impression like?

A business coach recently told a friend that when negotiating with a talented hire "we want him to be enthusiastic about working with you." If you offer too little, it may be too late to rescue the relationship. You may feel like you're getting a deal and the person you're hiring may feel like they are being undervalued. Money is a big motivator and if the Glassdoor study is accurate, it's the first impression many potential hires will have of you and your business (me and my business too, of course).

We all want to be enthusiastic about working with each other, so it's important to set the tone from the start. Aim for fair value exchange so everyone feels rewarded.

How Much Should I Pay Employees?

I need to test the idea that sharing performance goal examples and measuring key results with new teammates will help determine fair pay. Here's my thinking:

After a project is scoped and before work is started, I'm going to set clear objectives with the new hire -- be that an employee, contractor, or freelancer -- and we'll set a time to stop and review our work together, including compensation.

How do you figure out how much to pay someone? It'd be awesome to hear from you. Click here to @ me on Twitter.


Peter Preston

Peter Preston

I'm a Saas marketing manager at ThinkTilt, makers of ProForma for Jira. I'm also the founder of Dear Video, a recovering podcast host, and learning how to grown a brand on YouTube.
Brisbane, QLD