How much should you offer new hires? Should you offer a fixed salary for all candidates? Learn how to calculate a salary scale in Kenya and why you need one.
The scaling phase is a significant milestone for any business. Scaling a business opens new revenue opportunities, improves efficiency, and increases customer capacity. However, it can also drain staff morale if you don't hire new staff to handle the extra work.
Your new hires can also profoundly impact your business beyond boosting your output. They can promote innovation, increase diversity, and help build a more positive work culture. But that's only if you hire people with the right qualifications and attributes.
Your ability to attract the best talent depends on your attractiveness as an employer and—crucially—the salary package you offer them. Therefore, before advertising vacancies for new roles, it's crucial that you calculate a salary scale.
This article will define a salary scale, discuss what determines it, and demonstrate how to calculate it.
Ready? Let's dive right in.
What is a salary scale?
A salary scale is the range an employer is willing to pay a new hire. Also called a pay scale or salary range indicates the span between the minimum and maximum salaries you are prepared to pay a new employee.
When hiring for a new role, you rarely find your ideal candidate. So, a salary scale allows you to adjust your salary offers based on how well a candidate matches the qualifications, personal attributes, and experience level you require for the job.
Depending on the quality of the candidates who have applied for the role and how urgently you must fill it, you may be forced to hire people who barely meet your minimum requirements. Naturally, you will offer the candidate you choose the minimum salary on your pay scale.
Salary ranges allow companies the flexibility to pay people within the same pay grade salaries that match their skills, qualifications, and experience. They also enable organisations to adjust compensation for current employees based on company performance, experience, and longevity.
Salary scales reflect your compensation philosophy.
Salary scales reflect your compensation philosophy and ambition as a company. They show your mindset towards employee compensation and, to an extent, where you place employees on the spectrum of your different assets' assets' value to the business.
Creating a salary scale lets you rationally explain why you pay your employees a specific rate. But before calculating a salary range, you should establish your philosophy regarding employee compensation.
Do you want to lead, match, or lag the market on salaries?
Your compensation philosophy tells potential hires what drives your salary decisions. It answers whether you want to lead, match, or lag the market on salaries.
Companies whose hiring philosophy is to lead the market by paying the highest salaries generally attract the best talent. Their pay scale reflects an ambition to be the market leader in their field, which attracts people who want to rise to the top of their professions.
If you lack the resources to pay high salaries but still want to stay competitive, your philosophy will be to match your competitors. You could then strive to lead the market on other perks job hunters covet, like company culture, work-life balance, and flexibility in how, when, and where you work.
Few - if any - employers consciously choose to pay the lowest salaries on the market. Doing that makes you a training ground for your competitors.
Companies that lag the market often do so unconsciously, failing to research their market before setting salaries. They lack a compensation philosophy and, as a result, need to consciously set a salary scale for the positions they hire for.
Lag the competition only if you have an equally attractive attribute to offer.
Companies with the lowest salaries may rely on other attributes to attract talent. For instance, college graduates may forgo a high salary and choose an employer with an exceptional brand or highly regarded for training and innovation.
So, a large company like Safaricom can leverage its brand power to offer average salaries, knowing that some people value the prestige and job security of working for certain companies over high pay.
The downside to such a compensation philosophy is that once the employee has gained enough experience to add you to their CV, they will leave you for your competitor or become the competition.
After establishing your compensation philosophy, you can calculate the pay scale. So, what is the formula for the salary scale?
How to Calculate Salary Scale in Kenya
To calculate the salary scale, first research your competitors and establish the minimum and maximum salaries they pay for the role. You can also include other businesses that could compete with you for the same talent in your research.
The minimum and maximum salary values provide a guide on how much you should offer to lag or lead the market. To establish a salary scale that matches the market, you need to establish the midpoint or market pay point.
1. Establish the market pay point.
The market pay point is the middle point between your competitors' minimum and maximum salaries. So, if the minimum salary paid on the market is 30,000 KES and the maximum is 40,000 KES, the market pay point will be 35,000 KES.
The difference between the minimum and maximum salaries is the salary range spread, which in our case will be 10,000 KES.
2. Calculate the market salary range percentage.
The range percentage expresses the salary range spread as a percentage of the market pay point. It indicates the difference between the minimum and maximum salaries paid on the market.
Some organisations use the market pay point for their salary scale calculations, while others use the minimum salary value as the base.
We will use the market pay point for our calculation, which gives us the following salary scale formula:
Range spread / Market pay point X 100
Let's calculate the range percentage using our example:
10,000/35,000 X 100
28.57%
3. Determine your salary range percentage
How you interpret the range percentage depends on various factors, including your industry and location. However, a low range percentage generally indicates a structured pay scale that does not overlap between salary grades or job groups.
If you are in a competitive market, a low salary range percentage may make it difficult to attract and retain talent. Conversely, a high salary range percentage may mean that you are paying too much for talent.
The market salary range percentage shows how the market compensates talent in the job group you are hiring for.
In that sense, it helps you align your compensation philosophy with the salaries paid in the market. If, like in our example, the range percentage is low and you want to lead the market, you can be more aggressive with your salary scale and push your midpoint higher than 50 per cent.
So, after establishing your market pay point and the salary range percentage, you can decide which range percentage best sets the tone for your compensation philosophy.
In our example, you can use the 75 percentile as your market pay point but adopt the same range percentage of 28.57%. That will push the minimum and maximum salaries you are prepared to offer candidates beyond the levels obtaining on the market.
If your goal is to lag the market, you pull your midpoint below 50% and offer your minimum and maximum salaries for the role accordingly.
Using a fixed percentage formula to determine the salary scale
Some companies set a fixed percentage for how much higher they want their salaries to be above the market pay point. For example, if you want to follow an aggressive compensation philosophy and lead the market, you could pay 20 percent more than the market average.
You would use the following formula to calculate your working midpoint:
(Midpoint x fixed percentage) + midpoint = fixed percentage salary amount.
Let's apply the formula to our example:
(35,000X20%) + 35,000 = 42,000
That gives us 42,000 KES as the average salary we can offer candidates. In other words, that becomes our working midpoint, at which point we can apply the market's or our range percentage to obtain our salary scale.
So, if we settle on 30% as the salary range percentage we want to use, we would calculate our maximum salaries as follows:
Minimum salary = 42,000/0.85
= 35,700 KES
Maximum salary = 42,000/1.15
= 48.300 KES
Note that the difference between 1.15 and 0.85 is the salary range percentage we have decided to use above, which is 30%. Our salary scale will thus be 35.700 KES - 48.300 KES.
Therefore, depending on how well a candidate matches the skills and qualifications we require for the role, our salary will be within the 35.700 - 48.300 KES range.
With such an aggressive pay scale, we should be confident that these fair and competitive wages will help us attract the best talent. We can prepare a detailed job description and advertise the vacancy.
Align your salary scale to labour and employment laws.
A salary scale should be tailored to your company'scompany's specific needs and goals. It must set salaries you can afford and enable you to attract talent that can produce and perform at the level you have set for your business.
While you should easily meet the minimum wage requirements set by the law when your compensation philosophy is to lead the market on salaries, you will need to verify if you have chosen to lag the market.
Therefore, make sure your salary scales align with the law. The minimum salaries you are prepared to pay should be above minimum wage.
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It does not matter how attractive your salaries are if they are not paid on time and into the correct accounts. Some employees will choose an employer that pays average salaries if the payments are done efficiently and on time.
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