How Much Should Companies Pay Employees?

Up to 4.5 million workers in the U.S. quit their jobs each month, according to the latest Job Openings and Labor Turnover Survey.

When you consider the amount of money that companies spend on finding, vetting, and hiring replacements for people who leave their fold, you’ll see that turnover is a serious problem.

The amounts involved are huge, anyway. 

In this article, we’ll take a look at the factors that play into how much companies should pay employees and how to make sure that the workers are satisfied enough to stay. 

The Company’s Financial Capability  

The amount a company pays its employees is directly related to its financial capability. If a company is doing well financially, it can afford to pay its employees more.

However, if a company is struggling, it may have to cut back on employee compensation. In general, employers should pay their employees at least a little more than enough to cover their basic needs. 

The Premium to Get and Keep Quality Workers

In order to get and keep quality employees, companies need to pay a premium, which can be in the form of higher wages, better benefits, and/or other perks.

Ultimately, paying a premium for quality employees is likely to pay off in the form of increased productivity and profitability.

Going Industry Rates

Industry rates can be used as a guide to help companies determine how much to pay their employees. It is important to make sure that workers are paid fairly and competitively within their industry.

By paying employees industry rates, companies can ensure that workers will not be tempted to move to other companies that pay better. Employees will also feel assured that their employer is being fair to them, reducing their chances of seeking a job elsewhere. 

Past Employees’ Pay 

The common expectation is for companies to pay new hires relatively the same amount as what they received in their previous jobs. Employers, however, must remain competitive in the job market.

One of the ways to compete for good workers is to offer higher pay than what the new or potential hires received from their old employers.

Cost of Living in the Area

Paying employees according to the cost of living in their area includes not only wages but also benefits and other forms of compensation. 

For example, if the cost of living in San Francisco is much higher than in other parts of the country, companies need to pay their San Francisco employees more to cover the difference. The same is true for other high-cost areas like New York City, Boston, and Hawaii.

As you can see, cost of living can be a complex factor to consider, and this is often one of the reasons many companies find ASO service providers to help them.

The Bottom Line on How Much Companies Must Pay Employees

There is no hard-and-fast rule that tells employers how to set wages or pay employees. Nonetheless, every worker must be compensated according to the totality of their contribution or potential contribution to the company and the employer’s ability to pay.  

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