The Small Business Guide to Setting Salaries and Avoiding Pay Drama
In this episode of World’s Greatest Boss, Jackie Koch tackles one of the biggest challenges for business owners: how to determine what to pay employees. From understanding market rates to building a compensation structure that aligns with your business goals, Jackie walks you through a practical framework that balances what your company can afford with what it takes to attract and keep great talent.
You’ll learn how to assess if you’re ready to hire, how to research market rates (without paying for expensive surveys), and what to do if you can’t meet market pay. Jackie also dives into how to set up job levels and pay ranges that scale as your business grows, and why transparent communication about compensation is key to building trust with your team.
By the end of this episode, you’ll have a game plan for creating a fair and competitive compensation strategy — without losing sleep over it.
What you’ll hear in this episode:
[02:15] Questions to Ask Before Hiring — Why looking beyond finance (and thinking HR!) is critical before making a hire.
[07:05] Understanding Market Rates and How to Research Them — Where to look for salary data without overpaying for reports.
[15:40] What to Do If You Can’t Pay Market Rates — Creative alternatives like contractors, junior hires, and strengthening your value proposition.
[21:50] Building Job Levels and Salary Ranges — How to structure pay based on responsibility and expertise — even as a small team.
[30:05] Variable Pay Options — Bonuses, commissions, and profit sharing to supplement base pay.
[35:40] Why Transparent Compensation Conversations Matter — Avoiding awkward (and potentially costly) surprises.
[42:15] Different Types of Raises and How to Plan for Them — Performance raises, cost of living adjustments, and promotions.
[47:30] Common Mistakes to Avoid — Like overpaying “irreplaceable” employees and creating inequities.
Resources & Links:
Salary research tools: Payscale, Glassdoor, LinkedIn Salary Insights, Salary.com
READ IT INSTEAD:
The Small Business Guide to Setting Salaries and Avoiding Pay Drama
Figuring out how much to pay employees is one of the trickiest — and most important — decisions you’ll make as a business owner or founder. If you pay too little, you risk losing great people to better offers. If you overpay, you could stretch your budget so thin that it hurts your business growth.
But here’s the truth: there’s no magic salary number. You need a strategy that balances what your business can afford with what it takes to attract and retain top talent — and keep things fair and consistent across your team.
In this post, we’ll break down a step-by-step approach to setting salaries that helps small business owners and founders build strong teams without the headaches. Whether you’re hiring your first employee or growing a team of 20, these tips will help you avoid costly mistakes and create a pay strategy that works.
1. Ask These 5 Questions Before You Even Think About Hiring
Before you post that job ad, take a minute to hit pause and think through these key questions:
✅ 1. Do you have consistent revenue to support this hire? Are you hiring because of a short-term spike in business? If so, a contractor or part-time help might be a smarter move until things stabilize.
✅ 2. What’s the expected return on investment (ROI) of this role? Will this hire generate revenue, improve efficiency, or free you up to focus on growth? Every hire should be a force multiplier.
✅ 3. Can you afford all-in costs — not just salary? Don’t forget to add 30% on top of base salary to cover payroll taxes, benefits, onboarding, and training.
✅ 4. Will this hire allow you to focus on higher-value activities? Think about whether this person will give you, or your key team members, the time to focus on sales, growth, or product development — the things that drive revenue.
✅ 5. Is there enough ongoing work to justify a full-time role? If you’re unsure, test the waters with a contractor or part-time hire first.
💡 Pro Tip: Just because you can hire doesn’t mean you should — think long term!
2. How to Research What to Pay (Without Spending a Fortune)
Once you know you’re ready to hire, the next step is figuring out what to pay. Here’s how to do it smartly:
🔑 Use free or low-cost salary tools:
• Payscale
Tip: Always check at least 3 different sources to spot trends and avoid outliers.
🔑 Consider industry and location: Salaries vary a lot by industry and geography. For example, a marketing manager in NYC isn’t going to make the same as one in Des Moines.
🔑 Talk to peers and industry groups: Other small business owners and founders are your best allies. Ask what they’re seeing in terms of pay for similar roles.
🔑 Ask recruiters: Recruiters (especially specialized ones) often know current market rates and what candidates are expecting.
💡 Pro Tip: If you realize you can’t afford the “perfect candidate” at market rate, think creatively — more on that below!
3. What to Do If You Can’t Pay Market Rates
If you’re a small business or startup, paying top dollar might not be an option — and that’s okay. Here’s how to compete anyway:
💥 Offer flexible work (remote options, flexible hours)
💥 Invest in professional development — help people grow in their roles.
💥 Create a great culture — where people feel valued and supported.
💥 Consider hiring more junior candidates and training them up.
💥 Use contractors or part-time help for specialized skills.
Bonus Tip: Think about your Employee Value Proposition (EVP) — what makes working at your company worth it, beyond just the paycheck?
4. Build a Simple Job Leveling and Salary Structure (Yes, Even if You’re Small)
If you want to avoid pay drama (and pay gaps), you need structure — especially as you grow past 10-15 employees.
Start with 4 basic job levels:
1. Entry-level: Learning the ropes. Needs a lot of direction.
2. Mid-level: Can work independently with some guidance.
3. Senior: Highly skilled, works autonomously.
4. Executive: Big-picture, strategic, leading teams.
👉 Assign salary ranges to each level. This way, you can give raises and promotions fairly as people grow.
💡 Pro Tip from First Round Review: Job leveling isn’t just about pay — it also helps set clear expectations for performance and growth.
5. Use Variable Pay to Balance Risk
If you’re nervous about locking into a high salary, variable pay (like bonuses or commissions) can be a great solution.
Options include:
Performance bonuses tied to company or individual goals.
Sales commissions.
Profit sharing (even for small teams).
Equity (for startups, though less common in small biz).
Warning: Don’t just toss in a bonus to close a deal. If you offer variable pay, design it intentionally to drive the right behaviors.
6. Be Transparent About Pay — From Day One
Talking about pay can feel awkward — but if you don’t talk about it, your employees will (and probably not in a way that helps you).
Here’s how to keep things above board:
Be clear in job offers: Salary, bonus potential, when raises happen.
Explain how pay is determined: Based on experience, job level, market rate.
Be upfront about differences: If two people in similar roles are paid differently, explain why.
Plan for raises and promotions: Don’t wait for people to ask.
💡 Pro Tip: According to Harvard Business Review, companies that practice pay transparency see higher trust and retention.
7. Avoid These 3 Common Pay Mistakes
🚫 Overpaying one “irreplaceable” person — creates resentment.
🚫 Ignoring the total cost of hiring — salary is just one piece.
🚫 Avoiding pay conversations — leads to confusion and mistrust.
Final Thoughts: Your Pay Strategy is Part of Your Leadership
Setting salaries isn’t just an HR task — it’s part of being a great leader and building a strong team.
By thinking ahead, being honest, and creating a structure that grows with your business, you’ll avoid drama and keep your team engaged and motivated.