Employee Compensation: 3 mistakes small businesses make

Issues surrounding employee compensation come up frequently for the small business owner. When it’s time to start recruiting for a job there’s an inevitable question: how much should I pay employees? What’s a fair wage for this job? Or perhaps you aren’t hiring, but your employees are approaching you for raises. How much do we need to offer in raises to make sure we keep our best people?

employee compensation

There are 3 big mistakes I see people making as they evaluate employee compensation in these situations.

Mistake #1: Too little data.

I’m always shocked at how frequently business owners have salary discussions with their employees using nothing more than anecdotal information. The employee comes with salary surveys from Salary.com, or Glassdoor.com, or an industry trade group, and our instinct tells that these numbers are crazy high. But instead of countering with facts of our own, we call a few friends and ask what they are paying; and then come back to our employees and tell them they are out of line.

Your friend’s salary information is certainly relevant, and your instinct may be right about the Salary.com data. But you really need more than just notes from a few friends; you need more, and more objective data, so you can have a really productive conversation.

Mistake #2: Too narrow a view.

The second thing I hear from business owners is, “We can’t afford to pay them more.” Maybe this hasn’t been a terrific year for your firm, or maybe it has and you’ve spent a lot of money investing in computers, or offices, or new people… But regardless of the reasoning, it all comes down to the fact that your people are asking you for raises and YOU aren’t seeing more money in your pocket. I hate to say this to you, but it doesn’t matter.

You are competing for talent with a wide range of other businesses. If there is more work in your industry than there are people to do it, salaries are rising.

Mistake #3: Avoiding the issue.

Other business owners, when faced with pressure from employees (employees that they, ahem, need in order to be successful ) decide to just avoid the issue. “If I tell them I’m working on something, and then keep putting it off, maybe they’ll stop asking”. Not likely.

Avoiding the issue breeds resentment and communicates to the team that you don’t care. If and when the issue does come back up, in their frustration they may feel justified making higher demands, or walk into the conversation with a lot less good will.

What to do instead

Every year I encourage clients to go see what the market value is for their key positions. I have a problem using “industry survey data” because you don’t really know how a title translates to a specific role when you are talking about different companies. Instead, go out and see what jobs are actually being offered, and at what salaries.

I search Careerbuilder.com and look for real jobs, being offered by real companies, and compare them against the job that I’m pricing. It’s going to take some judgment on your part, but adjusting for the differences in roles and region, you can come up with a range that you have confidence in.

(I made a video explaining my process in detail here: What to pay for a particular job. )

Once you have a well researched salary range, you can be confident that if one of your people left you because they wanted more money, you could replace them in that range. If, generally speaking, your people are getting paid on the low end of the range, it’s time to bust out the raises. If they are on the high end of the range, you can be confident that you are paying them fairly. Having that confidence can make all the difference when it comes to hiring or just keeping great employees.

How do you figure out salaries for your employees?

Employee Interview Guide

Photo Credit: jypsygen

Devan Perine

Devan Perine works with small business owners on their marketing and multimedia efforts. She's passionate about helping businesses build their presence online, and giving Gen Y a voice in the workplace. When she's not working, she loves to make a mess in the kitchen, and play with her band around Chicago. She loves to chat! Give her a shout on Google+, Twitter or LinkedIn.

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