Creative compensation solutions for small businesses

Here are some best practices for cost-effective hiring and retention, no matter what happens in the world

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Attracting and retaining outstanding people is never easy, but today’s business environment complicates the challenge. The fallout of the COVID-19 pandemic—including supply chain disruptions, a distributed workforce looking for both fair compensation and work-life balance, and an unstable geopolitical landscape—have left medium-sized and small businesses (SMBs) scrambling. 

Compensation decisions are especially tough for small business owners because inflation and a competitive labor market have given workers unprecedented negotiating power. SMBs need top talent to thrive, but they can’t afford to get locked into compensation packages that become unmanageable when economic conditions change. 

Even with these complicating factors, there is a systematic approach for meeting the compensation challenge. Here are some best practices for determining fair pay for your employees.

Set a realistic budget

Any compensation decision begins with a budgeting process to determine what your business can truly afford. It may help to understand that just because the consumer price index (CPI) is up nearly 10 percent doesn’t mean wages follow in lockstep. A survey of employers by shows that most U.S. organizations (73 percent) are targeting a payroll budget increase of 4 percent or more this year, and a plurality of organizations (43 percent) are growing their salary merit-increase budgets by 5 percent or more. Those increases may be a response to inflation, but they are only roughly half of the CPI increase. 

The numbers are also a reminder that you may not want to solely use merit increases as a response to inflation. Instead, consider a business-friendly strategy that can help employees, such as quarterly bonuses tied to quantifiable results.  

Once you know what you can afford, assess wage inflation trends by job level, geography, and industry. Knowing which roles or demographic groups are in highest demand in your industry and region can clarify who is most likely to need a compensation bump. Note that some demand may persist beyond the current crunch, as some experts predict that fewer young workers coming into the labor market combined with low levels of immigration will create a shortage

Factor in geographic differences

As more people begin to work remotely, there may be market-driven pay variations between geographic locations. The most obvious is the difference between highly populated and more remote areas, but compensation can also vary state by state or county by county. 

Salary survey data can help you provide equitable compensation across labor markets. In fact, it’s important to put your company’s compensation budgeting in the context of market data. Regional pay studies, combined with an internal analysis of your company’s pay scales, may reveal which jobs in your company could benefit from a pay adjustment. 

As you consider these geographic pay differences, assess what roles must remain in a central office in a more expensive location. For people in those roles, clear communication about the reasoning is essential for keeping these employees engaged. 

Change the baseline for new hires

It’s best practice not to reduce compensation for existing employees, as you’re paying for their work and value, not where they sit. But for new hires in less expensive markets, regional baseline data on competitive pay is an opportunity to provide equitable compensation at lower cost. Also consider cost-effective benefits you can offer to sweeten the deal, such as giving remote workers access to a WeWork office space.

For existing employees in markets that have become more expensive, proactive analyses will help you understand the extent to which you need to make a market adjustment—and avoid the problem of having to scramble if key employees leave.      

Solicit employee insight

Use an annual anonymous employee engagement survey to gauge sentiment on compensation, benefits, and overall employment satisfaction. By asking employees if they believe they are fairly compensated and whether they believe the work they do is important to organizational success, for example, you’ll gain insight into what is working well and what improvements—to compensation and beyond—could keep employees motivated and engaged. 

These best practices—internal budget analysis, regional data and analyses, and employee input—position you to understand where and how you should offer targeted increases. 

In most cases, you should take a segmented approach:

  • Provide higher wages to new and high-performing staff in critical business segments if those people are underpaid. 
  • Prioritize people you can’t afford to lose and those who have lost ground, compensation-wise, to newer employees operating in the same role.
  • Use HR metrics like “years since promotion” to uncover people at risk of leaving.
  • Bring underpaid staff to the proper market rate, or even slightly above. 

In the end, remember that attracting, retaining, and engaging the right people involves more than just salary and benefits. It’s especially important in the current environment to infuse purpose and meaning into what your company is doing and the responsibilities of each employee; invest in personal and professional growth through training and mentorship programs; and advance diversity, equity, and inclusion.

Ultimately, there are no bargains when it comes to compensation. Because people are the heart of every business, compensating them fairly and keeping them fully engaged are essential. When you are fair to your people in the context of what is possible for your business, everyone wins.

Kristine Gunn is the executive director, talent and org management at TriNet, where she leads a team of HR and organizational strategy consultants that help businesses grow and scale by unlocking the potential of their people.

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