How do you determine what to pay someone?

1. What can the business afford to pay?
2. What are the market rates for this type of position? (see recruitment websites for guidance)
3. What can your business offer an employee in growing their skill sets so that they make take a different salary to get these skill sets? e.g. Apprenticeship, internship
4. What are people's expectations? Someone with a university degree qualification may expect more money than someone with only a leaving certificate.

How do you deal with yearly demands for expected wage increases and how do you control increases.

1. First get the starting salary right. If you are going to give a percentage increase each year, then a higher starting salary will result in a higher wage increase each year.
   Example
   Year 1 - Starting salary (a) 20,000
   Year 1 - Starting salary (b) 18,000
   
   Year 2 - 10% increase
   new salary (a) 20,000 + 10% = 22,000
   new salary (b) 18,000 + 10% = 19,800
   
   Year 3 - 10% increase
   new salary (a) 22,000 + 10% = 24,200
   new salary (b) 19,800 + 10% = 21,780
   
   Salary (a) increased by 4,200 over 2 years
   Salary (b) increased by 3,780 over 2 years but a lower salary is paid 21,780 v 24,200
   
   It is harder to decrease a salary!
2. Use your payroll program and bookkeeper to calculate what a change in pay will work out as. Keep changing the gross pay to see what change in net pay will result. If you can't use the payroll program, then get someone who can to give you the cost of payroll increases.
3. If you pay above market rates, expect to always pay above market rates. But demand more from the employee, because if they perform at the same rate as your competitor employees, you will have higher costs but no extra value will be gained. You will be paying more money for the same result.
4. Each person must have a job description and a contract of employment. If an employee will only stay if you give them more money and they are a key employee, then give them more work to do. If they can't do the extra work, then you can't afford to keep them.
5. Offer other benefits such as health insurance, pension, travel passes, training courses, more holidays, anything that makes it a disincentive for them to leave. Target them at the correct employees or you may find it difficult to get rid of employees you don't want to keep!
6. If someone does the same job year on year, usually an inflationary linked increase is all that should be paid. But for exceptional work or just to reward someone, then pay a bonus rather than give an increase. The employee gets a large increase in their pay in that week and that makes them feel good that week rather than spread it over many weeks and they see only a few extra euros a week in their pay packet.
7. We are sometimes afraid to let staff go because we may hurt their feelings or inconvenience ourselves. But in business we have an obligation to manage the business and sometimes we have to make uncomfortable decisions such as saying no to a wage demand.
8. Do not base a person's salary on their need to pay a mortgage or keep them in a lifestyle they like to live. The business must come first. You should pay a person on the basis of what they can bring to your business. The salary you offer will determine the type of person you will attract. If you pay below the industry average, expect below average work. If you pay above market rate, then demand above market work ethic.
9. There is no perfect answer to wage negotiations. But be aware, wage costs can spiral out of control and on average over 60% of costs can be wage related. The only way to cut wages costs, in the long run, is to sack people which is not something that is nice to do, but it may be the only way to save the business.
10. With each proposed salary increase think this way. For every 1 euro increase in salary, how much more do I have to sell to pay that 1 euro increase and can I get that extra sale and make more profit?

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(c) Nilsson Denver Ltd 2007