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What Is a Pay Rate?
Pay rate is “the amount of money workers are paid per hour, week, etc.” The amount that employees are paid for a defined pay period (weekly, semi-weekly, semi-monthly, etc.) is determined by their pay rate. Ranges are typically created beforehand. This allows an employer to determine the pay rate for employees by evaluating the expectations required for the job. This includes knowledge, skills, abilities, past experience and education. Pay rates can be affected by numerous market and demographic factors.
Why Is It Important for HR to Understand Pay Rate?
It’s important for HR to understand pay rate because it can give you a recruiting advantage. It can provide correct expectations through performance management and can help retain employees.
- Recruiting. Through clearly understanding the various pay rates and ranges offered by a company, HR can more easily attract new talent. When applicants are informed about the pay rate range relative to the job they are interested in, they are more likely to determine whether or not they want to apply. Andrew Flowers, lead labor economist at Appcast said, “the quality of applicants should be better, because they are more informed and can better determine whether or not they even want to apply.” Advertising the pay rate in the job title can give your company an edge over your competitors.
- Performance management. When pay rates have been defined strategically by an organization, management and employees can more clearly recognize the skills and abilities needed to perform jobs. This can motivate employees by rewarding them for performing well and by helping them develop the competencies necessary to advance within the company.
- Retain employees. If the rate of pay that is offered by a company for a particular job is below the market average, they will encounter a difficult time attracting and retaining employees. If your company doesn’t understand pay rate and its importance, you risk setting uncalculated rates, which may result in difficulty keeping up with the job market. If pay rates haven’t been updated to match changes in the market or economic circumstances, employees might go to a different organization due to low job satisfaction. Studies show that one of the top reasons employees decide to leave an organization is insufficient pay. This is why creating a clear compensation strategy is very important.
Factors That Affect Pay Rate
There are several factors that can affect pay rate at your company. Some of these include education, experience, the industry you’re in and the demand for a particular job.
If an employer values credentials and education, these could be determining factors that result in a higher pay rate. Employers who recruit for positions that require certain levels of education should also be willing to pay accordingly. Moreover, employees who obtain higher education generally expect to earn more money over the course of their careers as opposed to those who do not.
When a job position specifically details the years of experience that must be met, if an applicant with fewer years ends up getting the job, they typically won’t be paid the higher end of the pay rate. As employees gain experience, they become more productive. If an employer is recruiting for a position that requires a certain number of years of experience, they must be prepared to match it with an equitable pay rate.
Even though two people might hold the same job title, they still could be paid differently due to the industry they work in. The skills required to perform a job may vary depending on the industry. This affects the pay rate.
If a particular job is in higher demand than others, this can affect the pay rate. For example, if you’re recruiting for a position and your demand is greater than the supply, you may have to increase the pay rate to attract quality talent.
How Can Pay Rate Affect a Company?
Two of the ways pay rate can affect a company are overhead costs and productivity.
The rate at which your company pays its employees is considered an overhead cost because it must be paid “regardless of sales and profits of the company.” Increasing or lowering the rate can affect the price at which consumers purchase your product. If the pay rate is too high, you may have to increase your costs, which can deter consumers. If the pay rate is too low, your workforce may have low morale and be more likely to look for work elsewhere.
When the pay rate for job positions at a company is aligned with the market and employees feel they are compensated fairly, this can greatly boost their productivity. Although getting paid an equitable wage isn’t the only thing that leads to long-term productivity gains, there is evidence that it can play a large factor, can lead to increased motivation and can encourage employees “to do good work and remain at their job.”
How to Determine Your Employee’s Pay Rate
Determining the rate of pay for an employee will take time and effort. However, this process will greatly help your company in the long run and can contribute to attracting and retaining talent.
Step 1: Determine Market Rates
Using the factors to determine the pay rate for a particular employee’s compensation, you can analyze market rates to get a better understanding of what is fair. Take a look at the industry you work in and review the rates that other companies are paying. You could rely on the Bureau of Labor Statistics, or you could peruse Glassdoor and other online job boards.
Step 2: Understand How the Rate Affects Your Company
You may need to work together with accounting to better understand if the pay rate you are considering for a position is realistic or not. You’ll want to outline the maximum and minimum amounts based on what your company is able to afford. Does your company want to compensate in line with what the market rate is, or pay above or below it? You can also rely on the job description you used to hire your employee. A job analysis is typically done before creating the job description and can help you match your employee’s knowledge, skills and experience to the job you’re trying to fill.
Step 3: Negotiation
Having performed all of your research and analyses beforehand can assist you when it comes time to negotiate pay with your employee. It’s important to stay within your range based on the numbers you’ve crunched.
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Questions You’ve Asked Us About Pay Rate
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What is pay rate bias?
Pay rate bias is similar to implicit bias, which occurs when a determination regarding an employee’s pay is based on their race, gender or other factors which cause improper disparities. Sometimes employers don’t even realize that they are doing this, which is why it is important to become aware so they can correct it.
James has worked in the HR field going on 5+ years and has held various positions of leadership. His areas of expertise are in benefits, recruiting, onboarding, HR analytics, engagement, employee relations, and workforce development. He has earned a masters degree in HR, along with a nationally recognized SHRM-SCP certification.