How to set an employee's salary

Deciding your employees' salaries isn't a decision to take lightly

First published on Thursday, Jun 25, 2020

Last updated on Thursday, Jun 20, 2024

All being well, you’ll be paying these salaries for years to come — so you need to make sure they’re competitive, affordable, and fair.

This page assumes you’re setting a basic pay rate for employees, rather than performance-based pay and incentives.

Things to consider when setting salaries

Thankfully, setting salaries isn’t guesswork. You can determine them based on a combination of factors, through a straightforward process.

Set an upper limit based on your ability to pay

The first thing to consider is: how much can your organisation afford to pay? This might be a bigger question for smaller businesses, but setting an upper limit is a good place to start for everyone. Make sure the salary you offer fits your long-term financial plans.

Be competitive by benchmarking salaries

Offering an attractive salary (within your means) is a great way to attract top talent. But why offer more than is necessary to compete for suitable applicants? Consider benchmarking pay for the role…

  • By business size: How much are equally-sized organisations paying employees for similar roles? Can you afford to compete with bigger companies?
  • By region: The cost of living varies by region, and so does the general level of talent. Benchmarking salaries local to you will help you compete.
  • By sector: An HR manager at a financial services firm might receive a very different salary to an HR manager for a voluntary-sector organisation. Check pay rates within your sector when setting salaries.

Are you willing to negotiate?

Making room for flexibility and negotiation in your salary offering is another useful way to compete in the job market.

Many job ads offer a ranged salary based on experience. Many companies are also willing to negotiate salaries, to ensure they sign the candidate they want. If you’re willing to be flexible, remember to leave room for negotiation with your initial offer.

Individual spot salaries or graded pay?

According to recent research, there’s a 50-50 split between companies that offer individual ‘spot’ salaries and graded pay systems. Individual arrangements are more popular in the private sector, while graded systems are preferred within the private sector (CIPD 2015).

‘Spot’ salaries can help you compete more aggressively for the best candidates and reward exceptional performers highly, without being restricted by a wage structure.

Graded schemes take more work to set up, namely evaluation and grading of all the roles in your organisation. However, they can help you ensure staff are paid equally for equal roles.

Paying men and women equal salaries for equal work

Under the Equality Act 2010, male and female employees are entitled to receive equal pay for equal amounts of work. This includes variable pay and pension contributions, as well as basic salary.

As an employer, you must also provide information that shows an employee’s salary is equal if they ask for it. Employees can take you to tribunal if they believe they aren’t receiving equal pay.

Your method for ensuring pay is equal might involve:

  • Evaluating the roles in your organisation to determine which jobs are equal in terms of skill and responsibility.
  • A salary reviews that compares your current salary system with your job evaluation. Do employees doing equal jobs receive equal pay?
  • Adjusting salaries for new hires and gradually working towards equal pay for existing staff through regular pay reviews, where necessary.

Janine Lennon

Head of Payroll Services

Share this article

More on salaries and wages for your staff

Discussing salaries with staff

HR wants the best possible value on salaries or wages, while being fair and competitive. And for employees, a bigger pay packet can mean a ...

Read more about Discussing salaries with staff