Are you paying your employees enough?
For small business owners, offering competitive salaries and benefits is essential in order to hire the best employees and then retain them. But it can be hard to know how much to offer, when to give raises, and what benefits to offer—especially if your resources are limited.
This tutorial will shed light on those questions. We’ll look at ways in which you can benchmark compensation to find out how much to offer, and then we’ll look at some options for benefits: both the essentials and the optional extras that can help make your company a great place to work. Finally, we’ll look at how you can ensure you stay competitive and keep your employees happy.
This is part of a larger series on HR for small businesses, so follow along to learn more. Even if you only have a few employees right now and don’t have a fully fledged HR department like larger companies do, you’ll still need to take care of HR functions for your staff members, and this series will take you through what you need to know.
OK, so let’s get started with compensation benchmarking.
1. Compensation Benchmarking
The term “compensation benchmarking” simply means checking to see what other companies are paying people for similar jobs to the ones your employees have, so that you can ensure you’re competitive. Let’s look at an example of how it works, and see some resources to help you figure out the right answer.
How to Find Out How Much to Pay
For example, let’s say you run a small business, and you’re now hiring your first employee. How much should you pay that person? The answer will vary hugely depending on a number of factors, such as:
- where your business is based
- what industry you’re in
- what type of job it is
- how much experience the employee has
- how much responsibility is involved
There are various websites out there that can help you find that answer.
A good place to start is with government statistics. In the U.S., for example, the Bureau of Labor Statistics publishes free reports on wage data for different types of jobs. Average salaries are available either on a national level or broken down by state and metropolitan area, and you can segment the data by industry, job characteristics, and more.
If you’re based in a different country, check your government website or contact the department of labor to see what statistics are available. You could also check libraries or other information sources.
Then there are online tools that let you plug in a bunch of different variables and see very detailed information on competitive salaries, benefits and other details. Some of these are free to use at a basic level, but sometimes you’ll have to pay for more detailed reports. Examples of these tools include:
You can also contact specialist recruitment firms or consultants to get customized benchmarking reports. This route may be expensive, but these companies often have access to valuable data, so it can be a good option if your budget allows.
Finally, if you’re operating on a shoestring, another option is to do your own informal research. Look through job listings for similar positions to the ones you’re interested in, and see what salaries and benefits are being offered. Ask around within your own networks or at your local business association to get an idea of what’s reasonable. This research may be quite subjective and based on limited amounts of data, so consider this a fallback, and favor the above sources if possible.
Don’t Forget Internal Benchmarking
One last point to consider here is internal benchmarking. How do your staff members’ pay rates stack up against each other? Are they similar, or are there large discrepancies?
For a small business, this can be quite a simple and informal process because you don’t have many employees, but it’s important to consider the compensation of your various staff members and make sure that it all seems fair.
It’s fine to have different rates for different jobs and different levels of experience and responsibility, of course. But if you are paying very different amounts to people with similar jobs and similar abilities, that’s something you should look to even out. Pay particular attention to any discrepancies based on categories like gender, ethnicity, disability and so on. For more on that, see our series on diversity in the workplace.
Ideally, your employees won’t discuss pay and compare their salaries with each other. But if they do, it’s important for you to feel confident that they’ll find any differences to be fair and justified. And even if they never discuss their pay, it’s good for you as an employer to be clear about your pay scales and how everyone fits in with those on a fair, justifiable basis.
2. Essential Benefits to Offer
Pay, of course, is only one aspect of compensation. Employee benefits can be just as important in persuading people to join your company and incentivizing them to stay. In fact, some surveys have found that employees value benefits even higher.
A 2015 Glassdoor survey, for example, found that four out of five employees want benefits or perks more than a pay raise. So don’t skimp on your small business employee benefits. Consider them a cost of hiring employees, and factor that cost in as you’re deciding how many new recruits you can afford.
Some benefits are essential, while others fall into the “nice to have” category. In this section, we’ll look at some of the essential benefits. In many countries, some of these things are legal requirements, but even if they’re not required where you are, they’re pretty much essential to offer if you want to hire good people.
Unlike pay, benefits are provided across the board. So you don't need to decide on a benefits package for each individual employee—instead, you decide what you can offer to everyone, and then communicate that benefits policy to your whole workforce.
Note: Some benefits are mandatory to offer by law. Because labor laws vary so much in each country and Envato Tuts+ has a worldwide audience, we can’t go through the legal requirements in each place, but be sure to research them and ensure you comply with local regulations.
Paid Time Off
Employees need vacation time. How much you offer depends on what’s normal in your country. In the U.S., two weeks is often enough, whereas in Europe, employees will expect more like four or five.
Then there are public holidays. Employees should be paid for the major public holidays in your country even if they don’t work that day, and if you do require them to work on the holiday, they should get a paid day off another time to compensate.
And finally, employees shouldn’t be penalized for getting sick. They should get a certain number of paid sick days every year, and you should look at providing some sort of cover for more long-term illness too. You can take out insurance policies that will provide payments to employees who become seriously ill and can’t work for months at a time. Offering this benefit will give your employees real peace of mind.
This is very important in the U.S. and other countries that don’t have adequate state provision. Your employees depend on you to offer them some form of medical insurance. If you’re a very small firm and your budget is limited, you could consider either limiting the coverage to only emergencies, or asking employees to contribute a portion of the cost of the insurance.
In many countries in Europe and elsewhere, health insurance is not an “essential” benefit because people can access state healthcare anyway, but it can still be an attractive benefit to offer. There are also add-ons like dental and vision plans that employees will appreciate.
There may well be legal requirements to be aware of in your country, but even if there aren’t, it makes sense to allow parents paid leave for the birth or adoption of a baby. Again, standards vary, from 12 weeks in the U.S. to six months and upwards in some European countries.
Again, this depends on the system in your country—in some places such as France, where state pensions and compulsory systems are more prevalent, individual retirement planning is minimal. But in many countries, the onus is on individuals to save for their own retirement, and businesses are expected to help them.
There’s a bewildering array of different types of plan, but the basic idea of most of them is that you contribute a certain amount each month to an employee’s retirement pot, perhaps matching their own contributions dollar for dollar. It can be expensive to set these plans up, but there are often tax breaks on offer too. Getting help from a benefits consultant or lawyer may be worthwhile.
3. Enhanced Benefits and When to Offer Them
Now that we’ve covered the basics, let’s look at some other benefits you could offer, and when you might want to do that.
Some employers offer to pay employees’ tuition fees if they enroll in degree programs, professional educational programs, or other courses that are relevant to their work. This is a great way to offer a valuable benefit to your staff while also helping them to build skills and qualifications that will help them contribute more to your company.
What better way to motivate people than by giving them a share of the business, and hence a share of future profits? This can be a very powerful benefit to offer, but it’s not easy to structure it. You may need legal assistance to set up a valid ownership plan. If that sounds too complicated or expensive, then simply paying larger bonuses based on the company’s performance may be a simpler alternative.
Health and Wellness Programs
Your employees spend a lot of time at work, and it’s good to offer them programs that help them maintain their physical, mental and emotional health and wellbeing. There are loads of possibilities here: you could offer yoga and meditation classes, or do a deal with the local gym to give employees free or discounted membership, or offer free health checkups, for example. Some companies even offer in-office massages.
Getting to and from work can be expensive for your employees, particularly in big cities. Reimbursing employees for travel expenses can be a nice incentive, and it can help swing the deal if you’re trying to hire someone who lives further away. You can also give it an environmental aspect by subsidizing those who use “green” methods like public transport or cycling.
There are plenty of other things you can offer your employees, such as freebies or discounts on company products, or special deals you’ve negotiated with other companies or organizations. And then there are the little things around the office that can go a long way, like free healthy meals and snacks. They probably won’t convince someone to join your company or to stay if they’re unhappy, but they’ll contribute in a small way to employee satisfaction and even productivity.
Different Benefits for Different People
Offering useful benefits is a great way to attract not only talented employees, but particular types of talented employees. Certain perks will appeal more to one type of person than another, so you can use them to attract the people you want.
For example, a FlexJobs survey found that work flexibility and travel are more important to younger people (the so-called “millennial” generation) than to older employees. So you could offer those benefits if you want to attract younger workers. Older employees, on the other hand, may be more interested in solid healthcare benefits. And to achieve better gender diversity, consider things like generous maternity leave and childcare benefits.
4. How to Stay Competitive
Setting pay and benefits is not a one-time deal. It’s something you’ll have to stay on top of for each employee for as long as they’re with you.
Keeping Track of Changes
There are so many shifting variables to keep track of. For example:
- Your employees are getting more experienced all the time.
- Employees may get promoted or take on more responsibility.
- Inflation is eating away at the value of their existing pay packages.
- Your competitors are changing their own pay levels.
- The overall economic situation in your country is changing.
- Your company’s financial performance and future prospects are changing (hopefully for the better!).
- Changes within your industry may be changing what it means to be competitive.
This is why large companies have full-time HR departments to handle all this stuff. As a small business owner with a lot of other responsibilities, it can be tough to fit it all in, but you should make time on an annual basis to revisit each employee’s pay and benefits package to ensure it’s still fair and adequately takes account of the contribution they make to the business.
Establish a Baseline
At the very least, make sure you adjust your employees’ pay every year to keep up with inflation. This is because the cost of living usually rises gradually each year, so a $50,000 salary can buy a little less each year. If you keep people at the same pay rate for years at a time, they’re effectively earning less “in real terms”, as the economists say.
You should be able to find your country’s inflation number (often called the Consumer Price Index) easily from government statistics or news reports. In the U.S., for example, it’s reported by the Bureau of Labor Statistics, and in the U.K., it’s the Office for National Statistics. The current annual rate in the U.S. is 1.9%, so a U.S. business conducting an annual pay review now should give each employee a 1.9% raise as a basic starting point.
The annual review is a good chance to link pay to performance. You should be doing performance evaluations for your employees at least once a year anyway, at which you review their success in meeting objectives and set goals for the following year, so it makes sense to do the pay review at the same time. That way, pay is linked to performance, creating clear incentives and a motivation to achieve more.
Large companies often structure performance and pay reviews so that there’s a clear system applied across the board—people get scored from 1 to 5, and those with a top performance score get a certain raise, while those with lower scores get smaller raises or none at all.
As a small business, you could consider a scheme like that too, but if you have just a few employees, you might prefer to keep it more informal. The important thing is that, even if you don’t have a formal scoring system, you do ensure that pay is clearly linked to performance. Employees need to understand the incentives on offer for working hard and achieving their objectives.
Also factor in the company’s overall performance. If the business had a great year, and if your employees worked really hard to achieve that, then perhaps they deserve a little extra. You could consider implementing a formal profit-share program, where a certain percentage of each year’s profit gets distributed according to a particular formula. Or you could simply pay one-off bonuses in good years.
Finally, return to section 1 and keep doing the benchmarking exercise for each employee each year. Keep in mind that their own situation is changing—they are becoming more experienced and may be doing more complex work—and also the competitive landscape is changing.
So you may think you’re being generous by giving them an above-inflation 5% raise, but if their value in the job market has significantly increased during the year, they may be able to command a 10% higher salary somewhere else. Your “generous raise” may actually prompt them to start updating their CV and scouring the job listings. Remember that the “right” compensation level for each employee is always changing, and you need to keep your information fresh and current.
In this tutorial, you’ve learned how to set competitive pay and benefits for your small business. You’ve seen how to use compensation benchmarking to figure out how much to pay in order to hire the right people and then retain them. Then you’ve learned about various types of employee benefits you can offer. And finally, you’ve seen how to stay competitive by constantly updating your pay and benefits and linking them to performance.
For a very small business, all of this can seem like a lot, and you may not think you can afford to offer all of these benefits. But in many cases, the investment will pay off in the long run, as you are able to hire better employees and retain them for longer.
For more on HR for small business, follow the rest of this series, where we’ll be tackling issues like employee training, writing an employee handbook, the best HR software solutions, and more.
Editorial Note: This content was originally published in 2017. We're sharing it again because our editors have determined that this information is still accurate and relevant.