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Developing a Small Business Compensation Plan

I often get asked, “At what point (how many employees) should a company establish a formal compensation program?” It’s a good question with lots of different answers. Finding the “right” time depends on several factors. Let’s start with a couple of examples.

I worked with an organization in a high growth industry with 34 employees, many of whom were knowledge workers. The company wanted to create a small business compensation plan to ensure that they could keep their top talent engaged. Losing even one employee could have been devastating to this small business.

I also worked with an organization that had 1,400 employees spread across the United States. This company had never established a formal compensation plan. They were similar to a small business in their desire to stay away from established rules and structure. Often small business owners worry that a small business compensation plan would limit their ability to make good business decisions in regards to employee pay. However, the opposite can often be true.

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Why Develop a Competitive Compensation Plan?

Here are some of the advantages of creating a small business compensation plan.

• If you start small and build a solid compensation structure, it will be easier for the plan to grow with the organization. Organizations that try to create structure once they are too big have difficulty managing the project and the plan is harder to roll out across the organization. Starting small has the advantage of being more manageable than waiting until you are too big.
• It can be very impactful for a small business to make smart compensation decisions. We all know that managing compensation costs is not an easy task – but when done well it brings very positive results for the company’s bottom line. A small business is more likely to benefit from small, smart choices that can be repeated year after year.
• Employees actually like to know how compensation decisions are made. There is a greater likelihood that with a small business you have relatives or close friends working together in the business. Having an established small business compensation plan ensures that all pay decisions can be justified with data. You minimize the risk that employees feel that pay decisions are unfair.

So, how can a small business develop a smart small business compensation plan?

1. Find the right sources of compensation data – Most of the traditional salary surveys out there cater to large organizations that can afford to participate in the surveys. As a small business you may find that the data is highly biased to large organizations. This data will be useless to you, so you should find sources that collect compensation data from small businesses. Make sure you research and evaluate several salary surveys, before you decide on one.
2. Educate yourself – Building a small business compensation plan is not something that is routinely taught in business school. You’ll need to educate yourself in the basics of compensation. Don’t be intimidated, it’s not as hard as you think. There are also great tools out there with built-in “know how” that can help guide you through the process. PayScale Insight is an example of this type of tool.
3. Be smart about your competitive set – In a previous post I wrote about correctly defining your competitive set for salary benchmarking. This is even more critical for a small business. I was working with a client recently who had less than 50 employees. They were showing that their business development roles were “over-paid” after their salary benchmarking project. It turns out that they had lured the last 3 hires away from a company 200 times larger than they were. These roles were critical for the growth strategy of the company over the next five years so the investment in compensation was worth it. It wasn’t that the positions were “over-paid” but it was the case that their competitive strategy for pricing those jobs was different than the rest of the organization.
4. Communicate with employees – If you spend time and energy creating a small business compensation plan, let your employees know about it. Share with them the reasons why and the commitment you have to investing in the talent in the organization. You will be surprised how far this will go towards improving employee morale.

I wish you the best of luck in your quest to create a smart small business.

Regards,

Stacey Carroll
Director of Customer Service and Education
PayScale.com

Related Posts:

• Compensation Benchmarking for Small Businesses
• How Compensation Impacts your Business
• Is your Comp Plan the Equivalent of an AOL Account? 

Do you have a topic you would like Compensation Today to cover? Write us at comptoday@payscale.com.

Are you doing a salary review or compensation benchmarking project? PayScale provides up-to-date, external salary market data you can use right now. And, it is specific to the education, skills set and experience your employees.