Getting Employee Compensation Right –


According to the NFIB’s October Monthly Jobs Report, 61% of small businesses reported that they are hiring or would like to hire additional employees.  Job openings are currently most prevalent in the construction (56%), manufacturing (54%), and transportation (51%) industries, followed by the wholesale trades (44%), and retail (43%); and white-collar workers in professional services and communications are also being sought in large numbers.

Another important statistic boding well for the American worker in 2018 is that a record 37% of small business owners reported raising overall compensation in hopes of hiring and retaining employees in today’s tight labor market, which, incidentally, is the highest increase since 1989.  Fortunately, thanks to the tax cuts and regulatory reform initiated by the Trump Administration, entrepreneurs are able and comfortable investing more in their employees and businesses.  Depending on the study, employee compensation is anticipated to increase by 3% to 4% this year.

Although the market is very “employee friendly” this year, many small businesses fall short when it comes to “best pay practices” — which incorporates all forms of compensation (such as salaries, commissions, benefits, incentives, bonuses, and perks) into an integrated, cohesive plan.  PayScale’s Compensation Best Practices Report, for instance, revealed that only 29 percent of small businesses have a comprehensive compensation strategy, as compared with 37 percent for all organizations.

So, how can businesses improve their pay practices ?  Here are my five-(5) ideas small business owners should consider for resetting their compensation strategy in 2019:

First, employers need to make sure that they have gotten compensation right for the position.  If you want to recruit the best employees in your industry, you need to be paying a little more than your competitors.  Ways to understand current market rates for open positions include “world of mouth,” industry data, and hiring databases.  With respect to hiring databases, I usually consult, which does a very good job tracking pay ranges for most labor markets.

Second, Level I, II, III Job Descriptions should be drafted for each position, and wages / salary ranges should be tied to the job requirements spelled out in the employee’s job description.  Moreover, pay increases should be both transparent and objective.

So, a young technician who serves as a helper on jobs would need to master basic job skills, possess a general understanding of the company’s products and services, be industriousness, be trusted to check his or her work,  know how to make simple repairs, and understand which tools to use to make common repairs before being eligible for a pay increase.

A Level II Technician should be more experienced, and, furthermore, be able to perform all but the most difficult jobs to the company’s time, budget, safety, customer service and quality standards, while a Level III Technician would need to understand how to layout, perform, and troubleshoot difficult installs and repairs, effectively manage others, and interact successfully with customers.  Depending on the industry, he or she may also need to attain required industry certifications.

Third, each employee should be offered a “performance-based” incentive that is based on department metrics and the company’s strategic goals and objectives.  Believe it or not, depending on the type of business, 35% to 45% of small businesses today still do not offer incentive compensation.

[Because of the difficulty in properly implementing a performance-based incentive plan, you may want to consult with an experienced business consultant before setting up a performance-based incentive plan.]

Fourth, small businesses should be conducting quarterly employee evaluations and these evaluations should be tied to the employee’s quarterly incentive payouts.  In recent years, most big companies have switched from annual employee reviews to quarterly employee reviews.  In addition, company’s goals, objectives and other metrics have become much more dynamic.

Another reason to consider moving to quarterly evaluations is that regular employee feedback is very important to Millennials.

Last, small businesses need to be creative and fun with employee rewards.  For example, creating group incentives to celebrate outstanding team performance is a great way to encourage more teamwork in your organization.

For more detailed information about the latest small business compensation practices, a great resource is the National Federation of Independent Businesses’ (NFIB’s) Annual Employee Compensation Study, which is available on-line.