Small business owners often wonder how to determine a position’s salary, balancing competitiveness with budget constraints. It’s a valid concern and a common one. A 2026 Robert Half Salary Guide survey found that in the year ahead, over 70% of hiring managers are concerned about keeping up with job seeker expectations. Pay too little, and you risk losing good candidates. Pay too much, and you limit the resources available to grow the business.
What you’ll learn
What you’ll learn
Key takeaways
- Fair salaries help attract and retain employees while avoiding budget strain
- Salary benchmarking, pay scales, and compa-ratio targets create consistency
- Internal equity, pay equity, and compliance requirements reduce risk
- Payroll and HR software help monitor salary ranges and keep compensation systems on track
Striking the right balance is one of the more complex challenges owners face. This guide offers a step-by-step approach to determining an appropriate salary for a position. Start by analyzing job requirements, benchmarking the market, and structuring clear pay ranges. Armed with this data, small businesses can create compensation systems that are fair, consistent, and sustainable.
Why setting fair salaries matters for small businesses
Employee compensation shapes every part of workforce management. On one hand, fair salaries influence hiring, retention, morale, and compliance. On the other, underpaying can increase turnover and lower productivity, while overpaying strains budgets.
Turnover can quickly drain resources, but inequities create risks, as well. Pay compression is on the rise, with 58% of employers reporting that new hires sometimes earn as much or more than long-tenured employees. That damages morale and undermines internal equity.
Note that legal compliance is another factor. The Equal Pay Act, the Fair Labor Standards Act, and the laws setting the minimum wage by state require accuracy in wages, overtime, and pay transparency. Falling short exposes businesses to audits, penalties, and reputational harm.
Fair pay practices support compliance while improving engagement. In today’s mobile workforce, where 74% of professionals are considering new roles and more than half expect raises, compensation strategy is critical to retaining talent. To build a methodology that holds up, the first step is to carefully analyze each role and understand exactly what the job requires.
Having a strategy matters
The cost of getting pay rates wrong adds up. On average, replacing an employee costs 33% of their base pay, which means turnover in a $50,000 role can exceed $16,000. For senior roles, the cost can be several times their annual salary.
Now that we better understand why being fair matters when it comes to wages, let’s see how businesses can take a strategic approach to plan development.
Start with a clear job analysis
A job analysis outlines the duties, qualifications, and working conditions tied to a role. Documenting these details ensures that salary decisions reflect the actual scope of work rather than assumptions.
Start by writing down the core responsibilities and target deliverables. For instance, a sales manager may be expected to hit quarterly revenue goals, coach junior team members, and maintain strong client relationships.
Next, outline the required experience, certifications, and technical skills of the job. That might mean an industry license, a track record of leadership, or proficiency with specific software. Be sure to include the working conditions as well. Does the role require evening or weekend shifts? Can it be done remotely, or will travel be part of the schedule?
Taking the time to factor in these details makes salary decisions more accurate and ensures that they reflect the role’s full scope. This kind of compensation analysis also provides a solid foundation for salary benchmarking. Without it, comparisons to market data and external equity can be misleading.
Next, let’s find where you can gather data to see how the dollars and cents are coming together.
Benchmark salaries with reliable market data
Salary benchmarking gives small businesses the external equity perspective needed to set fair pay. Reliable data comes from multiple sources, including Glassdoor, PayScale, Salary.com, Indeed, and the US Bureau of Labor Statistics. In today’s market, using several sources helps balance outliers and determines the average salary for a position.
Adjust benchmarks for location, company size, and industry. Geography can make a big difference. As of June 2025, the average hourly compensation cost was $56.67 in the Northeast, compared to $39.94 in the South. Employers who ignore location risk either overspending or losing out on talent.
Remote and hybrid work can also influence salaries. A remote employee in a high-cost city may expect higher pay than one in a smaller market.
The output should be a salary range expressed as P25–P50–P75. For example, a role may fall between $45,000 at the 25th percentile, $55,000 at the median, and $65,000 at the 75th percentile. This framework lays the foundation for creating pay scales.
Create pay grades and compa-ratio targets
Pay scales give structure for each grade by defining minimum, midpoint, and maximum levels. A common approach sets the minimum at 80% of the market median, the midpoint at 100%, and the maximum at 120%.
Compa-ratio measures how an employee’s pay compares to the midpoint. The formula is simple: salary ÷ midpoint. A compa-ratio of 1.0 means pay is exactly at the midpoint, and a range of 0.85 to 1.15 is generally considered healthy.
Here is an example:
| Job | Grade | Min ($) | Mid ($) | Max ($) | Target compa-ratio |
| Marketing Manager | G7 | 44,000 | 55,000 | 66,000 | 0.85–1.15 |
This type of structure helps maintain fairness and reduces problems like pay compression. For deeper guidance, see OnPay’s insights on internal equity.
Balance budget with internal equity
Even well-defined pay ranges must fit within the company’s budget. Start with affordability checks, including projected headcount, payroll burden (wages, benefits, and taxes), and revenue per full-time equivalent. If labor costs rise faster than revenue, the compensation system will not hold up.
Internal comparisons are equally important. Monitoring pay equity is crucial to ensure that employees with similar roles are paid consistently. Gender pay gaps remain persistent. In 2024, women earned 18% less than men after controlling for age and education.
Creating pay structures that are fair and affordable also means looking beyond base salaries to the broader workforce plan. To build a solid foundation for growth, small businesses can use resources like our guide on hiring your first employees. You can also strengthen retention with proven recruitment strategies. With total compensation in mind, these efforts tie directly into compensation planning, paving the way to finalize salary ranges.
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Finalize salary ranges with total compensation in mind
Base pay is only part of total compensation. As of June 2025, benefits account for 29.7% of compensation costs for private industry employers. That means for every dollar of wages, another 30 cents typically goes to benefits like health insurance, retirement contributions, and paid time off.
For example, an employee earning $50,000 with benefits valued at $15,000 has a total compensation package worth $65,000. Communicating this full value strengthens retention and makes salary negotiations clearer.
Perks like flexible work schedules, training opportunities, and bonuses should also be part of the pay conversation. When added to wages and benefits, they reveal the full value of employee compensation. As the business evolves and those pieces in place, the next step is to put salary ranges into practice using tools that help track, monitor, and adjust pay.
Make it operational: Track, monitor, and adjust with confidence
Setting fair salaries is more than good practice — it’s a business advantage. When compensation aligns with market rates and internal equity, businesses reduce costly turnover, strengthen retention, and build engaged teams. In a labor market where most professionals are actively considering new opportunities, competitive pay structures help small businesses compete for talent without overextending their budgets. The challenge is maintaining that balance as roles evolve, markets shift, and teams grow.
By combining salary benchmarking, internal equity checks, and HR software, your business can create a compensation system that stays compliant and competitive. OnPay makes it easy to keep payroll accurate and, as needs change, adjust with confidence. Simplify the way you manage pay with trusted HR software. Have questions? Our team would love to hear from you!
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.