How Much Should Small Businesses Pay Employees?

The question of how much to pay employees can be a fraught subject. Part of that is due to the tumultuous nature of today’s economy. That tumult has swept old rules out the window.

In the past three years, the workforce has fundamentally shifted. Due to the Covid-19 pandemic, millions of former workers left the labor pool, leaving the workforce participation rate at 64.2%.

Some, tragically, passed away. Others retired early or left to take care of children or elders. Millions of other Americans—1.2 million, by policy expert estimates—became disabled.

And, of course, plenty of Americans faced death and decided to follow their own dreams. They quit their unfulfilling jobs. They took gigs that fit in easily with the meaningful things in their lives.

And they—along with 5.4 million of their fellows—launched their own businesses.

The net effect of all this?

The supply of workers is lower than its ever been. The demand for workers is higher—and will keep climbing as long as people keep starting businesses. With low supply and high demand, the value of labor is up.

Way up.

So: how should you pay employees?

Laws and Regulations

First and foremost, make sure you’re staying legal. Research the difference between exempt and non-exempt work.

The Fair Labor Standards Act entitles non-exempt employees to overtime pay. Non-exempt contracts state an employee gets $X per hour. Overtime pay typically pays time-and-a-half for all employee hours worked over 40/week.

Laws also regulate the minimum age of a worker, what benefits an employer must offer, and the absolute minimum wage by state.

Also, consider tax laws. Payroll for businesses must comply with state and federal laws. To tackle payroll challenges, it helps to have the right tools.

The Online Time Clock for Small Business is one such tool. It helps you budget your employee hours with easy-to-read, accurate data. Learn more about this tool, and others, to level up your small business savvy.

Research the Market Value

Ultimately, the value a given employee adds to your business is less important than the market value for that kind of work.

To research the market value of labor, organize specific tasks and their value to your business. Learn the typical terms for jobs that encompass those tasks. Then, research the market value of that labor by:

  • Researching offered rates for that work on job boards
  • Discover average pay rates on PayScale, Glassdoor, or LinkedIn
  • Learning about local labor rates through your Chamber of Commerce
  • See regional pay grade scales through the Bureau of Labor Statistics

These methods will empower you to understand the kinds of offers people who apply to your business will receive. To hire effectively, you’ll need to match or beat those offers.

Budget for a range. This way, you have space to offer more to a highly desirable employee.

Take Employee Management to the Next Level

Learning how to set wages wisely is a crucial management skill. It requires legal knowledge, budgeting, and market research.

And determining what to pay employees is just one of many challenging choices small business owners must make. To face these challenges, keep reading and learning.

For more business tips, tricks, and strategies, check out our content library.