Q: I am looking at hiring a couple of new employees. How should I set wage levels? What else should I offer in terms of compensation?



A: There are two primary approaches companies use to set wage levels: internal and external. The internal approach is called job evaluation, where you do a systematic comparison of all jobs to determine their relative worth. The basic idea is that a job that requires more skills, effort and responsibility than another should be paid more. After doing a job evaluation, you would know that job A is worth more than job B, which is worth more than job C and so on. The problem with job evaluation is that it takes time to do correctly; and while it creates a nice ranking of jobs, it doesn’t tell you how much each is valued in the external market.

The external approach involves the use of salary surveys, which provide wage rates for most jobs. While it can also be time-consuming to conduct your own, the good news is that there are free surveys available. I recommend the Bureau of Labor Statistics, which can be found at www.bls.gov/bls/wages.htm. Once there, you can click on “Wages by Area and Occupation,” then “Wage Data by State.” You then find the specific occupation you are seeking. If you don’t know what major occupational group the job falls under, just search for it in your web browser. While you could look at the “National Wage Data” instead, it typically makes more sense to look at data by state or metropolitan statistical area, because it adjusts for cost of living.

In terms of nonsalary compensation, there are many options, which vary by job. For example, executives tend to have access to many perks, while many other jobs only offer bonuses. Incentive plans are very popular these days and have the benefit of only having to be paid out when performance is good. You also might want to consider offering a solid benefits package (e.g., paid time off, health insurance, family-friendly benefits) if you don’t have much flexibility on financial compensation. I would encourage you to talk to other managers in your industry to find out what types of incentives and benefits they offer in order to ensure yours are competitive.


Kevin Henderson is an associate professor of management at the University of St. Thomas Opus College of Business.