Small businesses account for 99% of businesses in the United States and roughly 46% of the private-sector workforce. Yet many “workforce solutions” are targeted at businesses with over 500 employees. When it comes to small business compensation strategy and HR solutions, there is not one-size-fits all – but there are a set of steps that all businesses (big and small) can take to provide their employees with a sustainable, competitive, and equitable compensation program.

Small Business Challenges 

Small businesses face no shortage of talent management challenges. To start with, smaller teams often result in employees juggling multiple roles. When one person is part operations, part marketing, and also has a small HR function, how do you begin to determine what the market rate for their salary is? If you do feel you’ve arrived at a fair rate for the role, what is to say you have it in the budget? Many small businesses struggle with limited funding. Even if they want to be competitive in the marketplace, their budget may not allow for it. Small businesses may also struggle with career progression and staff retention. Depending on just how small a business is, leaders may not have had a chance to create a formal process – or roles – for increasing responsibility and compensation, which can lead to high staff turnover. 

Small businesses are particularly vulnerable to salary compression, though it is not a uniquely small business problem, especially during periods of inflation and staffing shortages. In order to bring in new staff, businesses will often offer higher wages without changing the compensation for existing employees, resulting in new and senior staff making close-to or exactly the same wage. In extreme cases, it means new hires are making more than existing staff. In either case, it’s a recipe for discontent and attrition. 

While being understaffed is not unique to smaller organizations, small businesses often have a sense of urgency when it comes to hiring and lack the HR infrastructure and tools that bigger businesses have. The business needed someone yesterday and so leaders may make hurried decisions without using data to determine what is fair and competitive for both the new hire and existing employees. This can also lead to equity concerns. Leaders make compensation decisions on an individual basis, causing unintended pay inequities among employees, which can lead to even greater compliance or retention issues. 

And when small businesses decide to address some of these challenges by changing the way they handle hiring and compensation, it’s not uncommon for leadership or board members to push back. There is a tendency towards doing things “the way they’ve always been done,” even when evidence suggests these practices are no longer working. The upside to all of these challenges is that there are solutions, and they start with a compensation roadmap. 

Small Business Solutions: A Compensation Roadmap 

As if the challenges we listed above weren’t enough, let’s add one more to the mix: When it comes to pay, most people are a bad judge of whether or not they’re compensated fairly. A survey from Payscale showed that, among employees being paid at market rate, 64% thought they were being underpaid. Add to this the high importance most employees place on compensation for their job satisfaction and it is clear that, no matter the size of the business, fair and clear compensation matters. A huge part of compensation satisfaction is ensuring that employees understand the policies in place, and feel the policies are thorough, transparent, and equitable. 

Building a Small Business Compensation Strategy

A complete compensation strategy doesn’t have to be overwhelming or completed all at once. Our compensation roadmap breaks it down into five steps. 

• Set the Compass: Define Your Compensation Philosophy

While many business owners are most anxious to take steps that feel tangible, sometimes it pays to start with “brain work” and knowing what values you want to be at the core of your policies. Defining your company’s compensation philosophy allows you to articulate core principles for how compensation works at your organization and sets the foundation for fair and consistent pay practices. It also mitigates challenges related to urgency and leadership/board support. Best of all, Edgility offers a free Compensation Philosophy Toolkit that will guide you through the process. 

• Pave the Way: Craft an Equitable Compensation System

Small businesses face many of the same struggles, yet each business has unique challenges as well. Edgility encourages a balanced approach when designing a compensation structure. We focus on four pillars: internal equity, external competitiveness, specific organizational considerations, and fiscal responsibility/sustainability. This allows for a personalized plan that grows with your business.  

• Extend a Ladder: Structure Job Levels for Growth

Defining clear job levels and career progression pathways provides employees and employers a roadmap for advancement. It can help with employee retention and puts helpful, transparent systems in place for use at all levels of the organization. For this reason, it’s best to prioritize this process and empower your team with an updated, timely system, rather than waiting until employees are ready to grow to figure out their options and paths.

• Illuminate the Path: Ensure Internal Equity and Transparency 

A compensation philosophy is the best first step for measuring up to your company’s values. It’s important, however, to make sure that those policies are communicated well, and that they’re working. Leadership needs to know how well staff understand the policies and make sure that all staff experience the same level of transparency throughout the organization. An equity audit, like the Talent Equity Assessment, is one of the best ways for businesses to understand where the organization is at and address any areas of weakness. 

• Build Bridges: Take a Proactive Approach to Implementation

The final step is to become proactive. Introducing a new compensation program can often introduce more questions from staff than it initially answers. By anticipating challenges and addressing them proactively, you can minimize disruptions and maximize the effectiveness of new initiatives. 

Small business compensation strategies are not one size fits all, and a learned partner can help your organization move through the steps of creating one with less stress. If you’re interested in further information on this topic, we invite you to speak with one of our Principals or watch the recent webinar we held with LTD Global.