A currently popular saying regarding compensation goes like this: Hire 5, work them like 10, pay them like 8.
This philosophy is interesting, if a bit simplistic. You should of course keep your boat's crew as lean as possible, not only because it keeps costs low and productivity high, but because in the long run it will also save the overhead and stress of layoffs. Rewarding people for working hard is also good compensation policy, but the real issue is that lumping all of one's employees into this pot means that some are going to make more money than they earn, while others will make less.
There is a tendency to see compensation as one of two things: a necessary evil (in the case of hourly and salaried employees) or a means to drive performance (for salespeople and executives). But compensation is actually one of the most powerful tools that you have to shape all employees' behavior.
Employees tend to do what they are rewarded for, and tend not to do what they are penalized for. Setting an employee's entire compensation package according to some arbitrary measurement (such as local cost of living) or fixed rate (a so-called "industry norm") does not drive a desired behavior or penalize an undesirable one. Instead, why not start with a base package of some kind that is based on the lower end of the suggested range for a given position, and let anything above that - up to 20% of the employee's total possible compensation, let's say - be earned according to the accomplishment of specific, beyond-the-minimum-effort milestones over the course of the year?
The milestones, of course, must be mutually agreed-upon, and the reward clearly spelled out. You must schedule regular meetings to closely follow progress and ensure that the employee has the resources necessary to accomplish the agreed-upon tasks. And there should be public recognition for those who do (for some, this is even more motivating than money).
If employees fail to accomplish agreed-upon goals, they should not be rewarded. This may seem obvious, but it is amazing how often it happens. If you're running things correctly, only those who perform according to clearly defined metrics should get anything - not those who go out for a beer with you or happen to work in the home office, where promotions seem to happen faster than at any other location in the company.
A reward system allows employees in each department to communicate where they think the holes are in the organization, empowers them to address them, helps them to grow (and shows you who is ready to move up), rewards employees for doing more than the minimum, and even makes them feel good about it.
If you're lucky, it might even take that chip off of everyone's shoulder about how salespeople are paid.