How Much Should I Pay My Staff? A Framework That Works

Jason Medlin
2 days ago
5 min read

Black-and-white photo representing employee compensation and team retention for small business

[Editor's note: This story is a composite based on real client experiences. Details have been adjusted to protect privacy, but the pattern is one I see repeatedly.]

Derek was losing technicians.

His plumbing company had grown to eight employees over five years. Good reputation, steady work, loyal customers. But he couldn't keep people. Every time he got someone trained up, they left for a competitor.

"I don't understand it," he told me. "I pay fair. I treat them well. But I keep losing my best guys."

When we dug into the numbers, the problem became clear. Derek was guessing at pay rates. He'd started people at whatever felt reasonable, given raises when people complained, and had no idea what the market actually paid.

Some of his people were underpaid by 15% compared to market. Those were the ones leaving. Others were overpaid by 20% for their skill level. Those were the ones staying — and underperforming.

The Guessing Game

Most small business owners set pay the same way Derek did: they guess.

They start someone at a number that feels right. They give raises when they're afraid of losing someone. They match offers from competitors when people threaten to leave. They have no system, no structure, no visibility into what the market actually pays.

This creates two problems:

You lose your best people. Top performers know their worth. If you're paying below market, they'll find out. And they'll leave for someone who pays fairly. You end up training people for your competitors.

You overpay your worst performers. Without structure, pay becomes political. The people who complain loudest get raises. The people who threaten to leave get matched. Meanwhile, your quiet solid performers get nothing, and your high-maintenance low performers get rewarded for being difficult.

A Framework That Works

Here's what we built for Derek. It's simple enough for a small business but structured enough to actually work.

Step 1: Know the market. What does your market pay for each role? This isn't guessing — it's research. Look at job postings for similar roles in your area. Talk to other owners (carefully). Use salary surveys if they exist for your industry. Get real numbers for what the market pays at entry, mid, and senior levels.

Step 2: Define levels. Create 3-4 levels for each role based on skill and experience. For Derek, this was: Apprentice, Journeyman, Senior Tech, and Lead Tech. Each level has clear expectations — what someone at that level should be able to do independently.

Step 3: Set pay ranges. Assign a pay range to each level based on market data. The range gives you flexibility — someone new to a level starts at the bottom, someone experienced at the top. Typically the range spans about 15-20% from bottom to top.

Step 4: Place everyone. Where does each current employee fall? What level are they actually performing at? What should they be paid based on the structure? This is where you find the gaps — people who are underpaid for their level and people who are overpaid.

Step 5: Create a path. Now raises aren't random — they're tied to level progression. Want to earn more? Here's what you need to demonstrate to move to the next level. This gives employees clarity and gives you a defense against "I deserve more" conversations that aren't tied to performance.

What Derek Found

When we mapped his team against the new structure, the picture was ugly.

His two best technicians were both paid $4-5 per hour below market for their level. No wonder they kept getting poached. They were doing Senior Tech work at Journeyman pay.

Meanwhile, one of his mediocre performers was earning more than both of them. He'd been there longest and had complained his way to raises over the years. He was doing Journeyman work at Senior Tech pay.

This was costing Derek twice. He was overpaying for mediocre work while losing his best people because they were underpaid.

The Fix

Fixing this isn't instant. You can't cut someone's pay overnight. But you can:

Fix the underpaid immediately. Derek gave his two best techs raises to bring them to market rate. Yes, it cost money. But losing them and training replacements would cost far more. They both stayed.

Freeze the overpaid. The overpaid tech didn't get a pay cut, but he didn't get raises either. Over time, as market rates rise, his pay will become appropriate for his level. If he wants to earn more, he knows what he needs to demonstrate.

Hire into the structure. Every new hire now starts within the pay range for their level. No more guessing. No more negotiating based on whatever the candidate asks for.

A Year Later

"I haven't lost a tech in eleven months," Derek told me recently.

His labor costs actually went up slightly in the first few months — those market adjustments weren't free. But his turnover costs disappeared. No more recruiting. No more training someone for six months only to watch them leave. No more lost revenue when he was short-staffed.

The net effect was positive. He was spending more on payroll but getting far more in return.

And the raise conversations changed. Instead of people complaining and Derek caving, the conversation became: "Here's what the next level requires. Are you ready? Let's talk about what you need to develop."

"It's not personal anymore," he said. "It's just the system."

The Math Matters

Before you build a compensation structure, you need to know what you can afford. This goes back to understanding your margins and your true labor costs.

What percentage of revenue goes to labor? What's the fully loaded cost of each employee (wages plus taxes, benefits, workers comp, and overhead)? What margin do you need to maintain to stay profitable?

You might find that you can't afford market rates with your current pricing. That's important information. It means you either need to raise prices, improve efficiency, or accept that you'll struggle to keep good people.

The numbers don't lie. They just tell you what's true so you can make real decisions.

Build Your Structure

If you're guessing at pay rates, you're probably making the same mistakes Derek was. Losing your best people. Overpaying your worst. Creating resentment and turnover.

At Bottomline Capital, we help business owners build compensation structures that make sense. We look at your market, your margins, and your team, and we build something that's fair, affordable, and sustainable.

If turnover is costing you or you're not sure if you're paying the right amounts, book a free consultation. Let's look at the numbers together.