The starting point is usually to find out what the "market rate" is. Factors that help determine the market rate for a job include:
- Whether the skills that are required are widely available
- The overall level of unemployment in the employment "catchment area"
- Whether the job requires specialised (or even highly specialised) skills
There are several ways in which a business can obtain data on market rates:
- Local employment agencies & job centres
- Job adverts
- Industry associations (who often perform annual surveys of pay in an industry)
The next question is – should the business pay MORE or LESS than the market rate?
Factors to consider here include:
- Does the business need above-average employees (e.g. salesmen with an industry reputation for being strong performers)
- Does the business need trained employees or is it prepared to invest in training beginners?
- Are the skills wanted by the business needed urgently (in which case – the business would probably want to pay more)
- Do factors affecting the mobility of labour need to be addressed – e.g. are there transport problems that need to be solved (e.g. pay for a rail season ticket) or relocation allowances to be offered to encourage new employees to move home?
The third important question is how to structure the remuneration package.
- Should employees be paid on the basis of time spent working (e.g. time-rates) or the amount they produce (e.g. piece rates) or some other measure of performance?
- Should the remuneration package be a combination of approaches (e.g. some basic pay per month + a commission-related incentive)?
In deciding the answers to these questions, a business should try to construct a pay structure that is simple (to help employees understand it), logical and fair