Compensation is a hot-button issue for employees, but it's an even bigger deal for small-business owners these days. With shrinking profits in this tight economy and costly benefits hanging over your head, there's no room for error in defining employee salary levels. Here are some tips on how to set your salary levels.

I run a payroll service and as you might expect, I hear a lot of feedback from our small-business customers regarding employee compensation.

My conversations with business owners have made one thing clear -- many business-owners struggle with the right amount to pay new employees.

It's a tricky issue. Overpay your employees and profits may drop. Underpay your employees and you'll get inadequate employees or you'll lose them over time to the competition.

The bottomline? Today's competitive business environment necessitates a solid basis for defining compensation levels. Here are a few things to consider when you define the target salary for a new hire.

National Salary Averages Are Irrelevant

Always think local. National salary averages mean nothing if you are located, say, in a small town in Kansas. In fact, salary levels for any given position are very location dependent.

If you are doing salary research, it's imperative that you look for salaries in your town or in towns that are very similar to yours.

Similarly, salary ranges vary considerably by industry. When looking at salary benchmarks, it's important to only look at those from your industry whenever possible.

In addition, the job description, not the job title, should be on center stage when researching salaries. It's what the person will do and what's at stake that matters, not the title that will go on their business card.

Online Salary Wizards

So where can you go to research salaries and why is salary research important?

Before prospective employees start interviewing, they will often check out online salary calculators such as the Salary Wizard at

To understand the expectations of your prospective hires, it's important that you find out what the online salary wizards are saying.

Unfortunately, some of the salary estimates that come from these online tools are way off the mark. In part, that's because the salary wizards are usually geared toward larger businesses, not small businesses. They also are usually bases on title, rather than job responsibilities.

For example, a customer of ours who owns a small PR firm informed me that the salary wizard pegged the average starting salary for a Media Relations Specialist in Chicago to be $45,000. In fact, he explained, a more typical range for that particular position is $25,000 to $32,000.

How's that for a scenario? You are ready to offer $31,000, near the high end of what you believe to be the salary range for a position, and the employee, armed with what they believe to be the right salary, says they'd like to get $45,000.

As you can see, regardless of whether the online salary wizards are right or not, it's well worth your time to find out what they say you should be paying.

If what you'd like to pay and what the online salary wizards say you should pay are way out of whack, you'll do well to check some other sources and be ready to present that data to any misinformed candidates.

Industry and HR Associations

Industry trade associations and HR organization are an excellent source for salary data. Most have undertaken extensive industry salary surveys and have salary data that you can access and evaluate. A quick call to your industry trade association will help you find out if they have the data you are seeking.

You can also ask for the data from associations you don't belong to. In many cases, the results of comparative salary surveys are available on association websites.

Peer Organizations

Talking to peers about current salary levels is always a good idea. Look for an organization that you don't compete with. Maybe you own an ice cream shop and the guy next door owns an apparel store. Since you are not directly competitive, you should have no problem sharing salary information for positions like a bookkeeper. By finding out what your peers are paying, you can get a good sense for market salary rates.

Competitive Research

Getting data about what your competitors are paying their staff is a much tougher assignment but it's doable. When a competitor advertises a position for hire, you might give their HR manager a call and ask what the salary range is for the position. Borderline unethical? Not really. This is routine competitive intelligence gathering in my opinion.

Think In Terms of Ranges

You should always have a salary range that you are willing to pay for any given position. Locking in on a single number is a mistake.

The reason you need to think in terms of salary ranges is that every job candidate has slightly different experience. You should be willing to pay more for a more experienced candidate because, in theory, their prior work experience will make them more productive in your organization relative to a worker with less experience.

Ask Candidates About Salary Before You Tell Candidates About Salary

It's always best to ask prospective recruits what their salary expectations are. Ask early in the interviewing process to avoid a scenario in which you both invest a lot of time only to find out that your expectations are completely misaligned.

Don't ask what a prospective employee wants in the way of salary. Instead, ask them what they need. Your top recruit might desire to earn $75,000 but maybe they only need to earn $55,000. Knowing what they need can help you to define the right salary.

Don't forget that compensation is much more than just cash. You need to tout the benefits of working at your organization and make sure prospective employees understand that value proposition. This can include typical HR benefits such as good health insurance but it should also touch on opportunities for advancement in the organization, training, mentoring, a friendly and fun work atmosphere, and the work itself.

Revisit Your Salaries Often

Salary ranges change constantly based on supply and demand. In a bullish economy, talented recruits are a scarce commodity and you may have to pay higher salaries. In bearish times, you can pay less. Currently, because of the economy, it's a buyer's market for employees. In other words, you can afford to offer a lower salary this year relative to prior years.

If your salary levels are based on research you did years ago, you'd do well to take a fresh look at current salary levels.

If you are not sure what to pay, my recommendation is that you err on the side of paying more than the market because talented and motivated employees can do amazing things. There a lot of areas in business where you can scrimp but paying your employees shouldn't be one of them.