Compensation and Benefits: The Truth About Overpaying vs Underpaying Staff

Decide How Much to Pay

Many articles have been written on benefits and compensation packages, so here’s my simplified advice: if you haven’t recruited anyone into a similar role for a while, you may be out of touch with the market rate. Your current staff salaries could be unrealistic. In order to see how competitive the market is, search a few job sites for similar jobs in your location, ensuring you’ve looked at a large enough sample to make an informed judgement. This will give you a rough guide as to what to pay. But you may need to adjust slightly as follows:

• “Overpay” for staff willing to take the risk of joining a start-up, a company in a turnaround situation, a declining industry or in an unattractive location.
• Adjust pay to economic conditions, paying less during recessions but more when the economy picks up, or employees may feel taken advantage of.

You also need to bear in mind that:

• Some competitors have deep pockets and pay too much, forcing you to respond.
• Roles in high demand can command large premiums.
• Some sectors have huge disparities. For example, the finance sector ranges from City traders earning millions to staff in high street bank branches on modest salaries.
• Trainees are paid less to reflect the amount of time you’ll invest in developing their potential.

At this point you may be thinking, “I can’t afford a higher salary!” But Great Performers pay for themselves if they’re working on value-adding tasks and are managed well.

You might also be thinking, “We’re underpaying our current staff!” They probably already know this. Some won’t mind because money isn’t the only reason they work for you. But some might already be looking for a new job that offers a better salary. I’d recommend you take steps to make them happier so you’re not about to recruit their replacement!

Fair pay is linked to the contribution made

While employers should treat everyone fairly, this does not necessarily mean paying everyone the same. True fairness is when you pay someone for the contribution they make. There should be pay differences because people doing the same job don’t necessarily achieve the same outcome.

There should be pay differences because people doing the same job don’t necessarily achieve the same outcome.

If a warehouse picker achieves 50% more than their colleagues, is it fair for them to be paid the same? If you were that great-performing worker, wouldn’t you leave?

You may be thinking, “Does that warehouse picker need a bonus, or are they happier with a reliable job and a good basic salary?” I find that Great Performers typically want both a reliable job with a good basic salary and a bonus because they want to be rewarded.

But don’t misinterpret my advice and start offering a low-base salary topped up with a bonus to equate to what other employers offer. This rarely delivers good applicants.

Similarly, if you’re a start-up you may be tempted to incentivise employees with share options, but this tends to attract fickle applicants who jump ship quickly. The best option is a combination of a good basic salary with bonuses linked to individuals’ outcomes.

The National Minimum Wage is Not a Guide

Too often I see hiring managers use the National Minimum Wage as a de facto to what they should pay (or try getting away with).

The National Minimum Wage is set by the Low Pay Commission to prevent low pay. Therefore, you shouldn’t necessarily be looking to pay low/minimum wages because it probably isn’t competitive.

Simply put, if you’re paying the National Minimum Wage you’re likely to get the minimum number of applications.

Make Benefits a Real Benefit

Most employers have to offer a company pension, holidays and provide free snacks and drink. Therefore, don’t think of these benefits as real differentiators from competing employers

Simple things such as free car parking can very valuable.

You might also consider using non-monetary rewards such as additional holiday, flexitime, remote/hybrid working, thoughtful gifts or peer recognition. The best benefits I’ve seen allow for personalisation as different employees appreciate different things.

But avoid thinking of allowing employees to dress casually, providing a friendly environment, or providing free food and drinks as ‘benefits’. They are more cultural statement. Additionally be careful with how mindfulness apps and coaching may be misconstrued as you getting employees so emotional that they need support!

Finally, understand that some employees would rather just be paid more so they can spend the money on ‘benefits’ for their friends and family. This is particularly important during a cost of living crisis.