Compensation planning might be one of the most important things you do as a small business owner since it directly ties to attracting and retaining the people who keep your business running each day. Base salaries are just the starting point for most employers, given the competitive nature of keeping employees. Compensation can include both financial and non-financial rewards, which combined are a key aspect of how your staff and potential new hires view your business.
Small business owners who put extra thought into compensation packages show their employees that they value a committed workforce; they’re willing to go further to retain their best employees, which can foster a sense of loyalty at the company. Ultimately, this drives business growth.
Whether you employ one person or hundreds, all small business owners face the same issue: balancing attractive benefits with financial feasibility. We’ll outline some options below that help address this. But first, how do you create or revamp an employee compensation plan?
Step 1: Create a budget (and revisit it often)
While there is no hard and fast rule about exactly how much to spend on payroll expenses, small business owners need to be extra careful about finding the perfect middle ground between overspending and underspending, given the possibility of cash flow issues. Allocating 20% – 30% of yearly gross revenue is a good place to start, though it’s not unusual for companies to spend 50% or more revenue on employee compensation and benefits.
Another helpful benchmark to keep in mind: plan to spend between 1.25 – 1.4 times base salary on employee benefits. That means if you have an employee who makes $50,000 annually, you should actually budget up to $70,000 for that employee. These numbers represent a pre-COVID analysis, meaning they don’t take into account the strong wage growth that has occurred since then.
Make sure to keep the necessities in mind: base pay, overtime, and mandatory benefits (like social security and FMLA). If you can afford it, setting aside a percentage for non-required but commonly asked for benefits is also wise. These include health insurance, 401(k) plan, flexible spending accounts, and similar incentives.
Revisiting your budget yearly is the bare minimum requirement. Ideally, you’ll keep track of what you’re spending and what you can afford to spend on employee payroll throughout the year, which can help you stay competitive as you reassess salaries.
Step 2: Check out the competition and conduct market research
After you’ve determined how much you can spend on a compensation package, it’s time to look at the competition. Start broad and narrow in: look at what your industry is paying in your city. Then dig into what specific competitors in your locale are paying their employees. You can do this by asking around town, or perusing job listings. The more detailed and specific insights you can get, the better. Afterall, your potential hires (not to mention your current employees) are doing the same research and making the same comparisons.
It’s also important to have hard data on what the market rate is for a given role at your company. You can get this information from various surveys available from government sources (like the Small Business Administration) as well as business consultants. From there, you can develop pay ranges for different roles and make specific pay decisions based on an employee’s experience and skill level.
Market fluctuations happen all the time, so it’s critical to continually assess what’s happening in your industry and city when it comes to employee pay as frequently as possible.
Step 3: Create an employee review cycle
This is an easy step to overlook in the compensation creation process. While employee reviews don’t have to be formal, they should be taken seriously. 42% of employees feel like their employers don’t care about them. Those same employees are also less likely to feel loyal, productive and engaged.
Taking time to communicate compensation with employees, as well as evaluating individual performance and growth opportunities (financial compensation and otherwise), is a clear indicator of caring for your employees. These conversations can be a great time to talk about expectations on both sides, creating a better environment and hopefully increasing retention.
Getting creative with employee compensation and benefits
What if, despite taking the time to review the steps above, you simply can’t afford to provide the most competitive compensation package for your employees? Perhaps you’re early in the life of your business, or you’ve had a difficult year financially. Fortunately, there are ways to get creative with benefits. The list is seemingly endless, but here are a few ideas to consider:
Phantom stock
Phantom stock (or phantom equity) is an excellent way to make employees feel and act like co-owners of your business, without the risks imposed by traditional stock options. Allocating phantom shares is also a unique way to incentivize employees to stay at your company longer term.
Profit sharing
Profit sharing is a great complement to phantom equity, and can actually be a component of a phantom stock agreement. While phantom shares provide a long-term incentive, profit sharing is a shorter-term incentive that is often implemented quarterly or annually.
Profit sharing is a controlled way of allocating a small amount of money that is strictly tied to company profits, so you never run the risk of not having enough cash to pay out your employees or go over budget.
Micro perks
Smaller perks can be a good way to show employees you’re thinking about their well being. Examples include free lunches, fitness classes, birthday paid time off, flexible hours, and professional development programs.
Finally, don’t underestimate the power of sitting down with your employees and simply asking them what they find appealing when it comes to benefits and overall compensation. This kind of transparency can be hard to create at first, but hearing out your employees as well as being honest about what you can and can’t provide as an employer can go a long way. A recent study found that employees who feel like they understand the reasoning behind their company’s decisions are almost 4 times more likely to be engaged at work.
By carefully balancing financial feasibility with competitive benefits, and by showing genuine care for your employees’ well-being and career growth, you can create a strong employee compensation plan that drives business success.
