How to Pay Employees: What You Need to Know About Pay Structures

employee pay structure - Portal CFO Consulting“How to Pay Employees?” This is a question that many who are new to owning their own business ask themselves.

And why not?

The people who work hard to make sure that your company succeeds deserve to be compensated for their time and effort, but it can often be difficult determining how pay is going to be distributed among your workforce. This is because there are a lot of different factors that you have to keep in mind.

When determining how much an employee should be compensated, you need to keep in mind qualities like:

  • Your location and what the average person in your area makes for the same kind of work
  • The condition of the job market
  • The employee’s background and experience
  • The industry standard

Beyond that, figuring out how to pay employees also involves how frequently they get paid, the method through which they get paid and how things like benefits and company perks will affect that employee’s pay.

Let’s take look at many of the other factors that you have to determine when it comes to employee pay and, hopefully, you’ll be able to conclude what the best practices for your own company are.

Ways to Pay Your Employee

When it comes to how you pay the people who work for you, the most important thing to remember is that you have three basic methods for determining how they will receive their income:

  • Commission – When an employee gets paid on commission, he or she receives pay based on what has been sold. A percentage of the goods that the employee sells will be given to them as their compensation, so if you want to determine how to pay employees so that they stay motivated and you keep key talent then commissioned pay might be right for you.

While this structure has advantages like unlimited earnings potential and some degree of freedom, you have to be aware of the fact that this pay structure can also lead your salespeople neglecting good customer service in favor of chasing the biggest possible sale.

A salesman who only receives commission may not take the customer’s needs into consideration, or they may choose which customers they aid based on who they think will lead to the biggest payday.

  • Hourly Wages – This is by far the most common method of payment in our society. With this structure, the employee is paid a regular rate that gets multiplied by the hours that they work over a pay period. If you’re looking for a method on how to pay employees that will produce work when you need it and keep you from paying an employee when business is slow, then this is the kind structure that you should use. You may also get employees who are willing to work at times when others aren’t, like holidays, because they may need the money.

Some Disadvantages to Consider

As a business owner, one disadvantage you face with hourly employees is that labor laws state that you have to pay overtime (the employee’s hourly rate plus half) for every hour over forty that they work. If you don’t limit how often those employees work, payroll can start to encroach on your margins.

  • Salary – Through this form of payment, the employee receives a set amount of money per year, distributed in the same amount every pay period. Salaried employees typically don’t receive things like overtime, but the tradeoff is that they have a bit more flexibility about when they work.

One disadvantage that you face as an employer is, if this is how you pay employees, your ability to offer compensation as a reward for additional work is limited because of the employee’s fixed income. Salaried pay may also offer little in the way of appreciation shown for the extra work that an employee does. This could potentially affect morale.

Which of these structures you use to compensate your employers can have a lot to do with what kind of business you run and the size of that business, among other things, but the structure of the pay isn’t the only consideration that you need to take into account when figuring out how to pay employees.

Other Considerations

Besides the structure, you also have to consider the method of delivery (traditional paper check or direct deposit) as well as the perks that you can afford to offer.

In addition to adequate pay, many employees and job seekers also look for benefits to make their lives easier.

Some benefits that many people typically look for in employment can consist of:

  • Insurance like health, dental, and vision
  • Adequate vacation time
  • Employer sponsored retirement plans where contributions are matched by the company
  • Flextime to work at least some hours at their convenience provided the quality of their work doesn’t suffer.

Remember, when thinking about how to pay employees, it usually goes beyond what you offer in the form of a paycheck.

Your employees want to feel like they’re valued and their contributions matter in the larger scheme of things. Beyond that, you can retain loyalty by offering benefits that ensure security and promote a healthy work/life balance.

Show your employees that they matter and you’ll get quality work out of them in return.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website www.portalcfo.com.  Follow us on Twitter @portalcfo

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1 thought on “How to Pay Employees: What You Need to Know About Pay Structures”

  1. Great article – very helpful! Thank you!

    Reply

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