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The HR Guide to Structuring Employee Compensation in Small Businesses

To say that employees are motivated by compensation is an understatement. But how does one put together a compensation package that attracts competent employees, rewards hard work, and helps retain talent without breaking the bank? This article covers a few tips and tricks for helping a small business navigate the often perilous compensation waters.

The Dollars and Cents of Employee Pay

The biggest and most obvious element in employee compensation is employee pay. Your employees are extremely aware of the dollar amount of their paychecks. They see it every payday. It’s the most prominent (and difficult) part of landing talent. As a result, you have to get this right to attract and keep talented employees.

The first thing to do is establish a pay philosophy. Elements that should go into your company’s pay philosophy include:

  • pay relative to the competition;
  • pay-to-benefits ratio (i.e. more pay and fewer benefits, or less pay and greater benefits?);
  • incentives for performance; and
  • whether the pay philosophy applies to owners as well.

At each element, you must ask yourself if the answer meets the needs of three parties:

  • Employees
  • Clients
  • Owners

Each answer must meet the needs of these three primary stakeholders for it to be a worthwhile approach to employee pay.

Next, determine what your competition is paying. At this stage, be sure to keep in mind to look at the competition for your talent. This may not necessarily be the same organizations as the competition for your business.

For instance, if you are a petroleum pipeline company trying to determine the pay scale for landmen, keep in mind that many other industries employ land professionals whose job titles may or may not be the same, such as utility companies and wireless infrastructure companies, just to name a few.

As job titles vary, it is important—even vital—to put together a proper job description. LegalNature's employment agreement makes it easy to specify clear job descriptions for your employees. When doing so, think about the following:

  • Scope and responsibilities of the position
  • Complexity of the position and its impact upon the company
  • Required skills, knowledge, and competencies for the position
  • Education and experience level required

Once you have a complete job description, the next step is to conduct research. This can be accomplished in three ways:

  • Discuss with others in the industry, possibly through trade groups
  • Using sites like Indeed and Glassdoor to determine the pay rates in your area
  • Google salary surveys for your industry

For smaller companies without dedicated HR departments, it may make more sense to hire outside vendors to obtain these ranges. In any event, these resources should give you a range for the position in question. At that point you’re ready to set the salary.

At this juncture, it’s time to determine what, if any, performance evaluation structure you should adopt. The key to developing an effective bonus system is establishing the right criteria for use in determining when a bonus should be awarded. Some of the criteria that may be used include:

  • improvement of a process or improvement of results;
  • improved customer satisfaction;
  • development and implementation of a new product or service;
  • improvement of an existing product or service; and
  • performing at a higher level during a time of higher or more difficult workloads.

It is important to have an incentive program in place that sets annual goals and performance appraisals for employees, establishes coaching and mentoring of younger employees, and fosters engagement and productivity.

Setting the pay rate at an appropriate level is important, but it is just as important to make necessary increases in pay and respond to economic realities like inflation. Top talent will start sending out résumés as soon as they think their pay is no longer appropriate for the position and responsibilities they have been given.

In order to address this, the first step is to ensure that job descriptions are up to date and to then determine whether the ranges are still accurate or require an increase. Once you’ve determined that the pay ranges are correct (or have corrected them if they need it), you should next check to make sure pay ranges are appropriate internally, too.

The easiest and best way to do this is to rank employees by performance and see whether their pay reflects their position in the company or department. If not, then you’ll want to adjust pay accordingly.

It’s important to make sure raises are done at or around the time performance reviews are held to make it clear that the raises are being carried out for performance reasons and are not just arbitrary.

Pay raises are generally done by percentage, not by a dollar amount. A raise of up to five percent is appropriate in most cases, though there are a few companies who may go as high as ten percent.

For tips on how to keep payroll expenses manageable, read our article "How to Reduce Payroll Expenses."

How to Benefit from Benefits

Back in the old days, the only thing you needed in order to keep good talent around was a competitive wage. However, because of wage controls implemented during the Great Depression, companies developed other ways to compensate their employees. Many of these non-monetary incentives are now commonplace and not only help you recruit and retain employees but are also tax deductible to the employer.

The first thing to determine is what percentage of your payroll expenses should be used on non-monetary benefits. Once you’ve determined this, decide what portion of that percentage to allot to each individual benefit. Having these numbers in mind will help to control payroll costs.

Healthcare benefits are the biggest and most expensive category of employment benefits. There have been several new developments in the area of health insurance that are important to know about, even for small businesses.

There is no easy way to know how much health care will cost, but most estimates for small businesses place the range somewhere between 7.5% and 15% of their overall payroll costs.

As a result of the Affordable Care Act, businesses with fifty or more full-time equivalent employees (FTE) must either provide health care to their employees or pay a penalty per employee. This is what is known as the Employer Mandate, and to determine whether your business is subject to it, you must first determine how many FTEs you employ.

The number of FTEs you employ may not be the same as the number of employees you have. The equation for determining your business’ FTEs is to take the number of full-time (30+ hours per week) employees you have and add to it the total number of part-time employee hours divided by 30. Do not include seasonal employees, contractors, or business owners in this number. Your business will fall into one of these four categories:

  • Self employed
  • Less than 25 FTEs
  • 25-50 FTEs
  • More than 50 FTEs

Individuals who are self employed may obtain coverage under their state’s individual marketplace.

Businesses that employ less than 25 FTEs are exempt from the employer mandate. Those businesses are required to offer full-time employees coverage under the Small Business Health Options Program (SHOP). Employers may choose from among four types of plans: Bronze, Silver, Gold, and Platinum. The main differences among the plans are how much the employee pays out of pocket for medical care and the amount of the premium paid by the employer.

Businesses that employ between 25 and 50 FTEs are also exempt from the Employer Mandate, but their tax credits are different than those for smaller businesses. In order to determine what your tax credit situation is use this calculator. Such businesses may still participate in the SHOP, and if your business does $500,000 in annual dollar volume of business, you are required to notify them about their eligibility for the Health Insurance Marketplace.

Businesses that employ more than 50 FTEs are subject to the Employer Mandate, which means that they will also be subject to a penalty of $2000 per employee after the first 30 employees or $3000 for each employee who utilizes the healthcare exchange with premium credits.

In today’s insurance marketplace there are four major types of healthcare plans:

  • PPO
  • HMO
  • HSA-eligible plans
  • Indemnity

A Preferred Provider Organization (PPO) plan is the most common kind of plan. In a PPO, the insured must use healthcare providers that are on the insurance company’s preferred provider list. Services rendered by providers not on the list may be covered at a lower level or may not be covered by the insurance company at all. These programs are best for participants whose doctors are part of the network or who don’t mind working with doctors in that network.

A Health Maintenance Organization (HMO) plan is one that covers services by providers that contract exclusively with the HMO. The insured individual designates a primary care physician (PCP) and obtains most of his or her health care through that doctor.

Services rendered outside the HMO are generally not covered except in the case of emergency. These plans are good for those who are willing to coordinate their health care through a PCP. Also, HMOs tend to cover more preventative medicine than other plans.

HSA-eligible plans are PPO plans that work in conjunction with a Health Savings Account (HSA). The HSA is a pre-tax medical savings account that, when combined with a high-deductible health plan, may yield more favorable tax consequences for the participant. These plans are most suited for the young and healthy and those who don’t mind paying higher premiums for unexpected illness or injury.

An indemnity plan is a plan where the participant pays for all the healthcare services and is reimbursed afterward by the insurance company. These plans offer the most freedom but are also typically among the most expensive. They are best for those who want complete freedom in choosing their doctor(s) but who are comfortable with coordinating the insurance billing themselves.

Depending upon the size of your company, health care may be a requirement that may use up a lot of your benefits budget. However, that doesn’t mean that your company can’t offer other, less expensive benefits that may be just as (or even more) appealing than the kinds of benefits bigger companies can offer. Here are a few ideas for alternative benefits that are either less expensive or completely free:

  • Telecommuting – In bigger cities, a commute may take up a great deal of your employees’ free time, and smaller cities may also require commutes that may be just as stressful as those in their bigger counterparts. Show your employees you trust them to be independent and on task by offering to allow them to work remotely. This could be on a regular basis—such as once or twice a week—or it could be only once in a while. Allowing them to telecommute will go a long way in boosting employee job satisfaction.
  • Professional development – In this day and age there are seminars and webinars on all sorts of professional topics. Show your employees that you are willing to invest in them by offering relevant opportunities for professional development. Not only will you gain happier employees, but you’ll make them more valuable assets to the company.
  • Flexible schedule or compressed work week – Employees often have personal chores or errands that they need to complete, but they either have to put doing them off or take off work to complete them. A flexible schedule (usually composed of four ten-hour work days and the fifth day off or nine nine-hour days and the tenth day off) will allow those employees to manage those personal tasks, spend time with family, or just recharge by sleeping in. It’s a great way to boost morale.
  • Gym or health club discounts – Many gyms and health clubs offer corporate or volume discounts, so take advantage of that. Dozens of studies over the years have confirmed the fact that employees who exercise are healthier, more productive, and experience less stress on the job.
  • Company-sponsored recreational sports – Build your company’s team dynamic by sponsoring a softball, basketball, or volleyball team.
  • Paid leave for volunteer work – There has been a surge in volunteer and charity work done by companies in the past several years. Offer to pay for employees to volunteer their time. The employee reaps the satisfaction from knowing he or she has helped out the community, and, in certain cases, the company may qualify for tax deductions or other tax benefits.
  • Employee discounts – If your company offers a product or service that may be useful to employees, offer them a discount. Alternatively, institute early access to new products or services, or extend the employee discount to friends and family.
  • Pet-friendly office – Allowing your employees to bring their dog or cat to work once in a while is a great and fun way to build morale and camaraderie. Plus, it lowers stress levels.

Software – The Latest and Greatest

Tracking employee benefits and payroll can become very complicated very quickly. Therefore, getting the right software is key to successfully implementing and managing compensation. Below are a few of the better programs for doing just that.

Voted one of the Awesome New Technologies for human resources at the 2013 HR Technology Conference and Expo, cfactor’s Vibe HCM is an HR platform that combines core HR, payroll/benefits, onboarding, communications, talent management, analytics and real-time AskHR functionality. It’s inexpensive to buy, quick to implement, and easy to modify.

The Bullseye Engagement Performance Improvement System encourages engagement between employees and the management team, which means a higher degree of employee satisfaction and organizational growth, as well as lowering legal and financial risks. This software encompasses total organization performance, including performance improvement and management, talent development, succession planning, compensation planning, and operations performance monitoring. Performance evaluations can be done in peer, team, self, and 360-degree formats. Users can create custom modules for managing goals and employee training. The program’s modular approach allows organizations to choose what they prefer now and then expand as needed at a later date.

CuroCamp is a secure program engineered to maximize the business impact of payroll and other compensation expenditures. It aligns the performance and reward budget to ensure that the correct mix of compensation goes to employees who contribute the most and are motivated to do so within a fair and transparent process.

How LegalNature Can Help You with Your Legal Form Needs

LegalNature offers several inexpensive and state-specific forms for helping you run a successful compensation program. We also have an ever-growing collection of articles on nearly every aspect of running a small business. Using our human resources documents instead of more expensive outside counsel will keep your costs down, which means you’ll have more and better benefits to offer your employees.

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