To attract and retain top talent, every business needs a compensation plan. With careful planning and research, you can learn how to determine employee pay and what benefits, perks, commissions, bonuses, and incentives will be included in your compensation plan.
The goal is to create fair and competitive pay, which means pay equal to or above market rates and equitable among your internal employees. It is critical in attracting top talent and determining whether candidates will accept job offers.
Competitive pay communicates to your employees that you value them and are investing long-term in them. Pay impacts employee satisfaction, loyalty, motivation and retention. Employees value when their employer openly shares pay information internally and in job listings, which is called pay transparency. This allows them to see whether their pay is competitive and equitable.
According to CNBC, “14% of business leaders say employees have left because they saw job postings with higher pay elsewhere, and 11% have seen a job posting within the organization and realized they were being paid less for a similar job.”
Whether or not you need to pay overtime depends on the employment classification. Non-exempt employees receive overtime pay if they work more than 40 hours per week, while non-exempt employees do not. Non-exempt employees usually receive hourly wages, while exempt employees receive salaries. There are several factors to consider in classifying employees as exempt or non-exempt. Use this ADP guide to correctly determine employee classification.
1. Create a Budget
The first step involves determining how to balance pay for all employees within your overall budget for business expenses. Identify all expenses associated with paying employees, including taxes and expenses reimbursements. Consider your cost and the monetary benefits for employees of the fringe benefits you offer. This includes benefits like health insurance, retirement plans, tuition reimbursement, stock options, paid holidays and PTO.
“A good rule of thumb is to put 40%-80% of your business revenue toward employee salaries,” recommends Nerd Wallet. However, this estimate will vary significantly depending on your industry and the type of employees.
2. Write Job Descriptions
Start by making a bullet list of the responsibilities, tasks, skills, experience, education and certifications for the position. Decide what is required, preferred or optional in a candidate’s background. Identify if the position is entry-level, mid-level or senior. Does the job entail management duties? Who will be their direct reports and supervisors? For ideas, inspiration and examples, view job postings for similar roles on job boards such as Indeed and LinkedIn.
You can then turn your job description into an external job posting by adding some additional information. Decide what messages you want to convey to applicants. The words and tone you use matter and impact who will apply. Show off your brand voice and company culture while using inclusive language to attract diverse candidates. Leaving out vital information or using exclusionary language will be a red flag to applicants.
3. Research Average Pay
After the job description is complete, search for industry-specific market pay studies and salary guides. The 2025 Salary Guide from Hays provides free salary and contractor rates across seven industries: accounting and finance, construction, engineering, human resources, life sciences, property and facilities management, and technology. The helpful charts include many job titles in each category at varying levels and show the geographic variabilities in gross pay across several cities and states.
It is essential to understand and follow the federal and state labor laws. In addition to the federal minimum wage, most states set their minimum wage, which may be the same, higher or lower than the federal rate. If there is no state minimum wage law or if the rate is lower than the federal rate, then the federal law usually applies. As of 2025, the following states do not have minimum wage laws: Alabama, Louisiana, Mississippi, South Carolina and Tennessee. View the state minimum wage guide to see the specific rates for each state.
Additionally, many states now have pay transparency laws. Use this table to view state pay transparency laws and salary history bans. In states that have pay transparency laws, employers are typically required to disclose pay ranges in job listings and will face civil penalties for failing to do so. For locations that have state or local salary history bans, employers are prohibited from asking about an applicant’s salary history at any point in the recruitment or hiring process.
Consider employment laws for remote workers, which are typically governed by the state that the employee lives in, not the state where the employer is located. Use a cost of living calculator to adjust the salary based on the applicant’s state. Employers may also make a Cost-of-Living Adjustment (COLA) in the future for multiple employees, either at their discretion or as mandated by law.
5. Set a Salary Range
Based on benchmark salary data combined with federal and state laws, identify the midpoint for your salary range. Once you have that number, it is easy to calculate the minimum and maximum range. This is also a good time to set the criteria for how workers will advance through the low, mid and high parts of your range.
Salary ranges need to align with your compensation philosophy as well as human resources strategies and goals. Follow this guide to create a compensation philosophy.
6. Plan for Raises and Bonuses
When determining employee pay, remember to budget now for yearly raises, bonuses and promotions. According to Investopedia, “most employers give their employees an increase of around 3% per year.” Pay increases vary depending on many factors, including inflation, performance, location and industry.
7. Consider the Job Applicant and Negotiate
Once you have decided who you want to hire, consider the quality, education, experience, and skills of the applicant to finalize what salary to offer. Do they meet or exceed your minimum or preferred qualifications? How much do you value the candidate and what they bring to the table? Is the candidate in high demand with multiple job offers?
Keep in mind that approximately half of new hires will try to negotiate salary, so allow some wiggle room in your offer. Expect that the salary will increase by 10-20% during negotiation. Remember, do not ask about salary history in your negotiation if it is illegal to do so in your location.
Show the applicant that you are willing to engage in a fair negotiation within a reasonable range. Be transparent about the company’s compensation philosophy and benchmarking data. Communicate the full value of your benefits package to the applicant. It may be enticing to offer extra PTO or a timeline for future bonuses, raises and advancements.
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