How Do Managers Justify Paying Employees High or Low?

In a small business, retaining key employees is critical for the stability and continued operations of the company. Due to the limited size of the business, one employee can represent a single point of failure. For that reason, it is crucial that small-business managers set employee salaries appropriately, to remain competitive within their industry and local market.

Internal Equity

  1. A manager should review the experience of the employee in relation to his position on the salary scale when justifying his salary. For example, he can justify awarding a higher salary to an experienced employee, and placing an employee with no prior experience at the bottom of the salary range. A manger should identify any other employees performing similar duties within the organization and assess the employee's salary in comparison to the others. He should consider factors such as length of service and experience, and keep in mind the salary of the employee's subordinates.

External Equity

  1. A manager should review the employee's prior salary history. An applicant is unlikely to accept the position if it pays significantly less than what he is currently making. In this situation a manger may be able to justify a higher-than-usual salary to attract the ideal candidate. Industry averages should be considered to determine the standard salary levels for the job, and comparable positions and organizations both within the local and national market should also be considered. Some employers have a policy to pay at a certain level, such as above the 75th percentile for the local market. The justification for this type of policy is to ensure salaries remain competitive enough to attract candidates of the highest caliber.

Market Forces

  1. Salaries tend to be driven by supply and demand, meaning that employees will accept a lower starting salary in a depressed economy with high unemployment rates, due to a lack of alternate options and competition. Conversely, a manager can justify offering more money in a period of economic growth, particularly when numerous companies are competing to attract the best employees. The company's own budget may also serve as the justification for a certain pay rate--for example, in a poor economy a manager may be required to take whoever will accept a significantly under-par salary.


  1. To some extent, salaries are also dependent on the candidate's insistence upon negotiating a higher salary at the start of employment. Paying a lower salary may be justified if the candidate did not negotiate, meaning he was happy to accept the pay rate he was offered. Some candidates will attempt to negotiate a better deal and may provide a manager with compelling justification for an increased salary. In some cases, if he cannot justify an increase to the base salary, a manager can offer additional perks or benefits so that the employee's total compensation may be considerably more than his salary alone suggests.