We live in a capitalist society. It teaches us that “money” is the true measure of all things. If you got money, then … (fill in the blanks), and if you don’t, well there must be something the matter with you. Unfortunately, very few have not been influenced by this sacred tenet. It would behoove you to keep this in mind when discussing wages with your staff, which brings me back to the topic of personnel management and the establishment of appropriate wages and compensation for your new hire.

Wage and compensation determinants:
Productivity is defined as the comparison between the quantity of goods or services produced and the quantity of resources employed in turning out these goods or services. It is this ratio of output to input expressed as a number that you can gauge the value of a task. By determining the additional value the person brings to your organization as a result of an increase in this ratio you can begin to develop a framework for your compensation program.

By far, the most widely used determinant of setting wages is obtaining “comparables”. Used by unions, the federal government and private companies, this method simply means, “pay the market”. Since wage rates can easily be determined because this data is readily available to both employers and employees, it has become the yardstick.

There is some correlation between the pay scale of a company and the quality of the business enterprise, even if it is only perceptive. Therefore, they tend to attract better employees and it becomes a self -fulfilling prophecy. This higher compensation also improves recruitment and aids in retention, especially in those hard-to-fill positions. In-N-Out Burger pays their lowest-paid employees starting out at $10.00 per hour and on their Web site they clearly state that and go on to say, “You are important to us and this is one way we show it”.
A popular concept in the labor movement is “ a living wage”, partly echoed by President Obama at the State of the Union Address when he referenced raising the minimum wage to nine dollars per hour. As Paul Krugman, Nobel prizewinning economist ( a must-read columnist) for the NY Times clearly states, “The preponderance of evidence points to little, if any, effect of minimum wage increases on employment”.

Most businesses say the major factor in what they pay is determined by the market but quickly add “if we can afford it”. However, upon further analysis, it is clear that this becomes a dubious claim when these same employers are asked to provide their methodology for determining this amount. They quickly retreat and start mumbling about their “willingness” to pay more if circumstances dictate it. Clearly, it is a mixture of both.
One major consideration is the supply of available potential employees in which to select from. Changing economic conditions can drastically affect this reality and force you to reconsider your initial projected wage levels. In declining industries you tend to have more flexibility than in industries that are either stable or experiencing rapid growth. Since wages is such a key component on your expense side and will largely dictate what you must charge for your goods or services, you must be extremely careful in setting these rates.

Stock incentives are utilized in many young entrepreneurial ventures and are sometimes used to attract and hold key personnel. Some small firms have created employee stock ownership plans (ESOPs), which give employees a share of ownership in the business. When coupled with a commitment to employee participation in the actual running of the business, it can motivate your employees and result in dramatic improvement in productivity.
Employee benefits include all payments by the employer for such items as Social Security, vacation time, holidays , health insurance and retirement compensation. Though terribly expensive, as much as 40 percent of wages in some firms, you must also consider them especially if you are in a highly competitive field. Some small firms have adopted what is referred to as “cafeteria plans”, which allows the employee to select the types of benefits they will receive on a limited basis therefore reducing the overall cost.

In conclusion, I strongly advise you not to be reluctant to paying remarkable employees spectacular compensation which inevitably will pay dividends and always remember, as primitive as it may seem, “you pay peanuts, you get monkeys”.