How to … Design & Develop a Pay Structure for Small Business

When we’re working with small business owners the subjects of hiring, pay ranges, payroll costs and appropriate pay increases come up. Since there is often no formal pay structure in place to act as a guide, the decisions in these areas tend to be knee jerk reactions when someone is hired, promoted, or asks for a pay increase.

Here is a simple four step outline on how to design and develop a pay structure that with a little effort can provide valuable guidance when faced with hiring, budgeting payroll and pay rate decisions.

  1. List Each Position and Create a Job Description – these do not have to be lengthy detailed job descriptions. The idea is to determine the basic primary and secondary duties in each position along with the skills or experience needed (i.e. customer service, bookkeeper, forklift driver etc.). Watch using job titles that are broad like “mechanic”, better to be more specific like “yard and equipment mechanic”. Focus the duties and the value they bring to production and/or servicing customers.
  2. Create a Payroll Budget for Each Position – start with creating a spreadsheet and list each employee and their pay rate that falls under the positions listed in 1 above. Now annualize the pay amounts and this forms the basis for a payroll budget, summarized by position, and overall costs. This exercise allows management to see pay discrepancies between staff and within positions and can help determine the cost impact of adding or reducing headcount.
  3. Research Your Local Market – the next step may be the hardest which involves comparing positions and pay structures to current market rates. There are so many sources of information this can be confusing, so focus on matching “job duties” and not so much on titles. The duties assigned to a position of “Line Supervisor” may be different from what typically shows on Monster or Indeed. Working with an outsourced HR consultant can help put this comparison together. This will be a valuable comparison when considering raises, or adjusting rates, to attract and/or retain talented employees.
  4. Devise a Pay Grade System – the last step is formalizing the list of positions, establishing pay grade ranges and assigning pay amounts based on experience, education, progression in a career, and prevailing market rates.The benefits of this four step process is a pay structure that is relevant to a business, aligns with defined positions, and offers market rated competitive wages. Armed with this information a business owner can determine the cost impact on changes, help budget for merit or annual increases, and provide guidance when considering staff changes or promotions.

Subscribe to our blog for more practical, small-business financial tips.
For more information please contact us at


Todd Rammler

Todd Rammler is the President and founder of Michigan CFO Associates.  Todd is a Certified Management Accountant (CMA), and holds an MS in Accounting from Walsh College (cum laude), and a BBA in Finance from Western Michigan University.

Join Our Newsletter & Learn

Get our latest content delivered to your inbox.

Join Our Newsletter & Learn

Get our latest content delivered to your inbox.

Subscribe to Our Newsletter!

Stay updated with the latest news, exclusive articles, and special content by subscribing to our newsletter.