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Three Compensation Challenges Confronting Small Businesses in 2018

As salary expectations accelerate, small companies are finding ways to address rising minimum wages and growing salary expectations to remain competitive in their hiring and retention.

Three Compensation Challenges Confronting Small Businesses in 2018

By: John Rossheim

As a small business owner, this scenario has likely become a familiar drill to you: An applicant for cashier smirks when you offer him just $3 above the minimum wage. Or your staff accountant--in effect the CFO of your small business--asks if you want to counter an offer she’s received that would bump her salary by $9,000. 

Yes, in these times of demanding workers and frugal customers, compensation is often a sore subject, particularly for small companies. 

Unfortunately, the challenge of paying workers more to compete for talent is only half the problem. A recent report from The National Federation of Independent Business (NFIB) found that 89 percent of those hiring or trying to hire find few or no qualified applicants for their open positions. 

The best approach to getting your business out of these compensation scrapes is to understand and leverage key trends in the labor market of 2018. 

We checked in with industry experts for their take on small business compensation trends, as well as with small business owners for their firsthand experience to help you make sense of this complex landscape for your small company.

Small business owners are often paying what the labor market requires
Small businesses know they must offer competitive pay to hire the best talent. Yet for many growing organizations, it’s a struggle to pay more while keeping their services and products competitive.

“What owners can offer in wages depends on their ability to raise prices--and we haven’t seen a big increase in prices,” says Holly Wade, NFIB director of research. 

Despite this challenge, many small companies have increased compensation for salaried and hourly workers to remain competitive. “Over the last year, an increasing share of owners has raised pay,” says Wade. In fact, according to an NFIB survey, the net proportion of small employers that boosted pay during the previous three months--minus those that decreased pay—rose to 31 percent in January and February 2018, a higher rate than any month in 2017. 

How are small businesses finding the means to pay their employees more? 
The Tax Cuts and Jobs Act of 2017 do give some small businesses greater leeway with compensation. “Tax relief certainly frees up capital to better compete for qualified applicants and increase wages to retain employees,” says Wade. But not all small businesses benefit equally from the tax-law changes. 

Another approach that some companies are taking is to make an end-run around labor regulations and wage laws, boosting their use of workers who are not on their payroll. In order to curb customer delivery costs, for example, Columbia Wine Company of New York City is considering replacing W-2 labor with the EpiFruit delivery service, which is similar to Grubhub or Uber Eats, according to owner Rohan Duggal.

Companies are concerned about paying enough to retain good workers
Savvy small business owners know that their workers—especially Millennial workers--like to do online research and are wise to compensation trends across their industry. 

“Employees have a lot more information about pay than they did a decade ago,” says Tim Low, a senior vice president at PayScale

As a small business owner, it makes sense to keep an eye on what rival companies are paying, rather than automatically offer incumbent employees nothing more than a cost of living adjustment.

The good news: what entrepreneurs often lack in cash flow can partly be made up with pay flexibility. 

“Private companies are more nimble,” says Carolyn Thompson, an entrepreneur and managing principal at recruiter Merito Group. “They can readjust pay bands and give people performance reviews more frequently or eliminate reviews entirely in favor of instant feedback” and spot bonuses. Some 62 percent of small businesses use individual incentive bonuses, according to PayScale.

Some smaller companies, especially professional services firms who hire white-collar employees, can offer profit-sharing and company stock. And more businesses are doing so, according to Thompson. 

Benefits such as profit-sharing plans, increased 401(k) matches and 100 percent vesting from day one on the job are all trends that are increasingly offered by small employers, adds Thompson.

Higher minimum wages spur reconsideration of workforce strategy
In today’s low-unemployment market, even low-wage workers are aware of the multitude of opportunities in today's economy. That means many small businesses are struggling with attrition and workforce churn. 

“I very much worry about keeping people,” says Duggal. “People in retail are not mostly there to be passionate about it. With that mindset, they might look for other jobs.” 

The Federal minimum wage, which has stood at $7.25 per hour since 2009, is quickly evolving. In 2018 alone, 18 states and 20 localities have increased their minimum wages, as reported by the National Employment Law Project.  

These hourly pay increases are actually part of a long-term plan to increase hourly pay. Seattle, New York City and California are among the places that are scheduled to increase their minimum to $15 by 2022 or sooner. 

For many small businesses that rely heavily on low-skill labor, rising hourly wages are a cause of financial strain. State and local minimum wage hikes “push the wage scale up for all other workers, so that their experience and capabilities can be reflected in their pay,” says Wade of the NFIB. “We hear from our members that if they have to raise salaries, then they may have to delay filling a position.”

This is the situation that confronts Duggal of Columbia Wine. “The $15 minimum wage that’s coming at the end of this year requires me to outsource some jobs like bookkeeping and marketing,” he says. “I’ll be eliminating positions where I can.” 

Duggal’s shop employs about 15 people, in hourly positions like stock and delivery, and in salary and commission roles like sales and management. His cashiers and delivery people now make $13 or $14 an hour; other employees earn more than the forthcoming minimum.

While these compensation dynamics aren’t likely to go away any time soon, your small business can find ways to compete for talent. Start by being honest, flexible and transparent with employees. Use bonuses rather than base-pay raises to help retain workers. And be sure to share your company’s unique employer branding story with candidates in your Monster job ad. The benefits are twofold: your job description will effectively reach local seekers, while you get access to free candidate management tools to track views and applications.