What do small business owners need to know to round out a “Total Rewards” strategy? For those not familiar with Total Rewards, it includes tangible and intangible rewards that attract and retain your talent, your employees. The tangible rewards are compensation and some benefits. But employees are placing more and more value on the intangible rewards possible from work-life balance, learning organizations, positive leadership styles and organizational cultures. Let’s begin with our three part series with a look at your compensation strategy, the first component of a “Total Rewards” package.
#1 Decide what to pay for each position in your organization. Will you hire everyone at the same rate or establish a range of pay which varies based on experience and education? Will you “lag,” “meet” or “lead” the market wage rate? Startups, who are pouring profits back into their fledging business usually “lag” or just “meet” the market wage rate. As businesses mature they often “lead” the market in an attempt to acquire and retain the best talent; a strategy utilized to maintain their market share.
It pays to research the market, enlist the help of HR Consultants, or acquire benchmarks reports when determining the market rate. If you guess, and guess wrong, you may exceed the market rate, paying too much and cutting into your profits or you may lag the market rate causing you to lose good employees. If you are paying too much, this is a difficult decision to reverse and has long lasting effects.
#2 Determine how and when you will reward your employees with salary increases. Owners may offer three month, annual or no increases. If you can’t afford to offer increases when you begin your business, create scenarios that help you determine when you will be profitable enough to do so. If you can add additional compensation and benefits to your strategic plan, it will help you communicate the desired future state of your organization to your employees.
On the flip side, many owners increase employees pay, percentage-wise, far too much in the first year reducing the ability to offer raises in subsequent years. For example, if you start employees at $10 per hour, award $1 at 3 months, and $1 at a year, this employee has received a 20% increase in the first year. By comparison, the national average for annual salary increases is about 3%.
#3 Consider a promotional policy. Each position should have a range or “pay grade,” with a cap, to prevent employees from making more than their supervisors. There are other means of rewarding long term employees who reach that cap. An example of a promotional policy might be to award an increase of 10% OR starting them at the lowest end of the pay grade, whichever is higher.
#4 Evaluate the use of incentives or bonuses. Bonuses, usually awarded on an annual basis, can be used in addition or as an alternative to salary increases; they allow you to reward employees for during profitable years. Sometimes startups use this strategy to reward employees during profitable years without being locked into a higher salary rate for perpetuity. Incentives are short term drivers that motivate sales people to “make the sale” and teams to reach a production goal. They can be very effective when you find the “sweet spot,” the amount that is meaningful to the employees while giving you a good return on your investment.
Compensation, or payroll, may be one of your largest controllable expenses so consider these factors, run the numbers and plan the future! Next, we will discuss Benefits followed by Leadership & Culture, for the complete view of a Total Rewards Strategy.