The cost of employees can be one of the biggest numbers in a small business budget. Consequently, decisions about what to pay employees can cause a small business owner much consternation. The objective is to pay them enough to keep them but not so much that the business can’t make a profit. In this article, I will not attempt to address employee rights or the very thorny issue of whether or not small businesses should bear the costly burden of benefits. However, I would like to address some fundamentals at the core of this issue.
When unemployment is high, it is tempting for employers to believe they can attract high performing workers while offering low compensation. The folly in this kind of reasoning is that it defies a general law of the universe; you get what you pay for.
According to Dr. Bradford Smart, in his best selling book, “Top Grading”, professional sports teams do not expect to get A players if they are only willing to offer C player wages. And yet, some employers expect to get high performers while offering low compensation. Sooner or later this strategy is bound to backfire. High performers who are not treated as such will leave resulting in turnover which is very costly for employers. At the very least, high performers who are not treated as such become resentful and unconsciously withhold their best. In the end, the deluded employer gets what they paid for: C performance.
C performance and turnover aren’t the only consequences of not giving employees commensurate rewards for their contributions. Disgruntled employees are more likely to take sick days, file disability claims, steal, blow the whistle, and file lawsuits.
So, what can a small business do to avoid these unsavory consequences? The short answer is quite a bit.
When determining what to pay employees, the first step is to find out what others are paying. Wage and salary data is accessible through classified employment ads, networking with other businesses, employment agencies, and online. Monster offers free wage and salary data at their website.
An important issue to consider relative to pay is how much of the business’s success depends on employee performance. If the success of a small business has little or no correlation to employee performance, then the issue of what to pay may not be an issue. However, even when employees have little or no visible impact on the bottom line they always have the potential to either build or tear down the business’s brand.
If the bottom line does depend on employee performance then it is in the best interest of the business to reward employees accordingly. An important issue to consider is how much competition exists in the market for these kinds of employees. If competition for talent is intense, the small business will need to not only pay “market rates”, it may need to offer comparable benefits. Otherwise, competitors can easily recruit employees away.
No matter what position an employee holds, a certain percentage of their pay should always be based on performance. Business owners should determine the key performance measures for each position in the company based on the outcomes they expect employees to deliver. For example, salespeople are expected to deliver revenue. So, a significant portion of their pay is usually based on revenue.
For positions other than sales, a smaller percentage of their pay can be based on performance. For example, in customer service, a percentage of their pay can be based on customer satisfaction and retention. Ultimately, performance measures should be correlated to key business success indicators such as revenue, profitability, customer retention, etc.
Contrary to popular belief, pay is not the only way to motivate and reward employees. If giving employees healthy annual pay raises isn’t in the company budget there are many other methods for motivating, recognizing, and rewarding good performance. Beyond pay, employees place a high value on good benefits, opportunities for career advancement, training and development, and a positive work environment. You will find thousands of ideas on how to reward employees for good performance in Dr. Bob Nelson’s book, “1001 Ways to Reward Employees”.
Properly designed reward and recognition programs can strengthen employee engagement and reinforce behaviors that produce positive business results. However, don’t make the mistake of thinking all employees will respond to the same rewards and recognition programs.
In order to produce the desired results, the criterion for receiving rewards and recognition must be must be understood and achievable by everyone. A word of caution; they can backfire if management is perceived to favor certain departments or specific people.
Gift cards can be very effective as a reward or recognition for performance. An afternoon or a day off with pay, a free lunch, or a free dinner is another way to reward or recognize employees. Notes from management are another way to recognize employee performance. The notes employees receive can then be drawn once a month for a gift card or a more valuable reward.
I know a local small business owner who loves to cook. On occasion he will prepare a variety of homemade salads and bring them in for lunch for his entire staff. Every Friday during the summer the company has a barbecue. The owner as well as the employees bring in dishes, sit down to eat together, and enjoy a benefit that is totally unique to this company. I don’t know how much this benefit costs the owner, but, I imagine that it is worth every penny.
The key is to make sure that the compensation you offer employees is competitive and motivates the level of performance your business needs in order to succeed. Also, you will need to review compensation periodically. One thing is certain, the cost of living continues to rise and if your employees absorb too many of these increases, they may become disgruntled and/or decide to leave.
There is a fundamental principle that has a dramatic impact on employee performance regardless of rewards and recognition. That principle is revealed in the best selling book by Marcus Buckingham and Curt Coffman. In, “First Break All the Rules: What the World’s Greatest Managers Do Differently” the authors share insights gained though in-depth interviews with over 80,000 managers from 400 companies in a Gallup study. The research indicated that great managers have very little in common, except the belief that, “People don’t change that much. Don’t waste time trying to put in what was left out. Try to draw out what was left in. That is hard enough”.
Buckingham and Coffman assert that talent can’t be taught. Each employee is uniquely wired for certain tasks and has a natural desire to perform them. If management places employees in jobs where they are allowed to express and are rewarded for using their natural talents, superior performance is likely. Unless these employees are mistreated and/or grossly underpaid, they will not only perform better, they will want to keep their jobs, which reduces turnover. It is a win-win for employees and employers.
One of the most powerful issues that impacts employee performance is the behavior of the manager. A hallmark of a great manager is an ability to secure the trust and loyalty of their employees. This ability can be cultivated by integrity, competence, and a genuine concern for one’s employees. Pretty words about employees being a company’s most important asset are just that, pretty words, unless employees feel their manager truly cares about them. In summary, managers who inspire superior performance know that you cannot light a fire under people; you must build a fire within them.
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