Compensation Strategies for Small Business Owners
Deciding how much to pay your employees is among the most critical issues you are likely to face as a business owner. Paying people too much cuts into profitability, while insufficient compensation usually results in high turnover and poor morale. Because setting appropriate pay levels is such an important part of your company’s competitive strategy, relying on guesswork or the demands of individual job candidates in setting pay levels for employees can be risky. Resources that provide concrete data on the prevailing pay practices within your industry and region are often more useful than anecdotal evidence in helping you to formulate an effective policy for recruiting, retaining, and motivating qualified workers.
Be Informed
Reviewing salary data for specific positions within your targeted recruiting market is a useful starting point. The website of the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) features comprehensive data on compensation broken down by occupation, industry, and geographic area. You can also purchase customized surveys from compensation consultants and market researchers. Other potential sources of salary information include classified ads and professional associations.
In addition to collecting data on the pay rates and practices of competitors, it is essential to familiarize yourself with the legal requirements for employers in your state, including minimum wages, overtime pay, payroll taxes, and workers’ compensation insurance. Remember that wages or salaries generally represent only two-thirds of actual employee costs, with the remainder made up of taxes and benefit costs.
Most full-time, permanent employees expect benefits as part of their compensation package. While providing health insurance is especially expensive for small businesses, some affordable options may be available through a broker. You may also offer a range of less costly benefits, such as a basic retirement plan, group life insurance, paid vacation, and access to flexible spending accounts.
Establish a Company-Wide Pay Scale
Before setting salaries or wages for individual employees, consider establishing a standard compensation structure for your organization. To begin crafting a pay structure, write down all the responsibilities and functions of each job. Using these job descriptions as a guide, rank each position from the lowest to the highest in terms of value to your business. The next step is to group positions that are similar in value to the organization and that demand roughly similar skill levels into a single grade. For each grade of positions, create a pay scale with a maximum, minimum, and midpoint wage or salary. In order to rise above the scale for an individual pay grade, employees will be expected to earn a promotion or take on additional responsibilities that place them in a higher grade.
The prospect of a raise or a bonus can keep workers motivated. Include criteria in your compensation structure for earning raises, which may be based on performance, seniority, or a combination of the two. Concrete and attainable goals for each employee should be set and discussed during regular performance reviews. Referring to these individual performance goals and your organization’s compensation structure can make it easier to explain your decisions regarding promotions, raises, and bonus awards.
Consider All Your Company’s Strengths
Lacking economies of scale and significant clout in the marketplace, smaller businesses are frequently unable to match the pay and benefit levels offered by larger companies. Yet smaller employers can make up for less generous compensation packages by providing workers with flexibility, responsibility, and a pleasant working environment. In a survey conducted by Salary.com, employees of smaller companies cited several reasons why they remain in their jobs, including work/life balance, commute, loyalty, their relationship with their boss, and their relationships with their co-workers.
If you can’t beat the pay packages of larger competitors, you can still leverage your company’s strengths during the recruitment process by stressing the enhanced opportunities for attaining positions of responsibility that a smaller organization can provide, and by offering candidates a company culture in which individual contributions are recognized as essential to the success of the business.
