1. Write a job description.Before you decide on a salary structure for a given individual or position, you need to spend some time outlining the core duties of the job. That means writing a detailed job description so that you don't end up trying to attract an office manager with an assistant's salary."The small employer has this funny situation: They are looking to hire someone to do a job, but the ideal person is someone who can do that job but can also do a bunch of other things," Coleman says.

2. Look for market data.Once you have a clear idea of what kinds of duties the employee will be performing, you should then research what others are paying for the same position. You can find information on exact dollar figures through a wide variety of sources. Industry associations, colleges, chambers of commerce and the U.S. Department of Labor's Bureau of Labor Statistics are just a few places that publish salary surveys.Particularly important is tracking down the most focused data you can find. "Always look for localized surveys," says Mark Lipis, a compensation consultant in Los Angeles. "The only exception to that is if you have a proprietary technology and you need one of the world's best technicians. If the future of the company means having one of these world's best on your payroll, then you look at national [salary] figures."Once you have statistics in hand, compare them with what you're offering. If you're paying within these ranges, you should be fine. You don't necessarily have to set a rate that is at the top of the scale, especially if you aren't confident that you can handle it."Paying competitively is like a ticket to get into the game," says Fred Lange, president of HR Architect, a human resources consultant based in San Anselmo, Calif. "If you're within 20% of what the market is, you're paying competitively. If not, you need to work on your structure."

3. Go beyond base salary.Other compensation methods such as incentives, bonuses and profit sharing also can be used to attract and retain employees. These programs can prove particularly important to the small-business owner who may not be able to pay top dollar in salaries. The key is to use them effectively. Bonuses and incentives that are paid out at the same time every year, regardless of whether or not your employees deserve them, become expectations rather than rewards. In that sense, they're more a part of base compensation rather than incentives."Base salary is the easiest tool to deliver, and everyone understands it the most. The problem is that once you increase people's base salary, you get basically two days of impact. The day you give it to them, and the day it hits their pay check," says Daniel Moynihan, a principal and senior consultant with Compensation Resources in Upper Saddle River, N.J.That said, you need to make sure that extra compensation is tied to superior job performance. Keep an employee worksheet with which you can track performance criteria. This system will make it very clear to both you and your employees how much work they are putting into the business."I'm a strong proponent for having any of the incentives you use be connected to performance. If an employee does X, they get Y," Lange says.

4. Don't overlook non-financial compensation.There are other ways to compensate your employees without paying out of the company's pocket. Smaller businesses can offer their employees a greater range of responsibilities and faster career advancement, Coleman says. For some employees, increased responsibility can be just as valuable as an increase in pay."In a small business, it's much easier to be part of the decision making or strategy because it all happens, in many cases, in one room. The key decisions are made with input from everyone. And that in and of itself is valuable, particularly to an entry-level person, because it's an exposure that they would not normally get for many years," Coleman says.Another aspect to use to your advantage is flexibility. Not only can employees advance faster in a small business, they also can often find a better balance between work and life."You have to pay an adequate pay rate," Lipis says. "You can certainly make your place a desirable place to work by ensuring that the non-compensatory elements are also positive."