Navigating Compensation Challenges: Strategies for Small Businesses

If you're looking for new ways to attract and retain employees while remaining financially stable in a volatile economy, you'll want to take a close look at your compensation strategy.

In fact, 70% of employers plan to improve their benefits and compensation strategies in 2023, according to recent data from Mercer. Companies that offer a convincing total compensation package have a much easier time attracting new employees. In fact, top talent will apply for a place in your company and give your company a choice. This is in direct contrast to other companies that struggle to receive even a single application for their open positions.

However, crafting a compensation strategy that's sure to impress isn't just about offering high salaries. It must be a comprehensive, thoughtful plan that defines all of the ways you will compensate your employees and explains why each component is important to your company and your employees.

Once you have a strong compensation strategy in place, execution is the next challenge. By centralizing internal policy documentation, performance management and payroll into one system, IceHrm makes it easy to create a unified experience. Learn more about our award-winning HR software today!

What is a total compensation package?

A total compensation package includes much more than just a salary or wage. Total compensation packages can consist of both cash and additional types of compensation such as paid vacation, retirement account contributions, profit sharing, and more.

Companies that are able to communicate their total compensation package through a digital offering from the start can increase the number of candidates who actually get hired.

There are two different types of compensation that can make up an overall compensation package:

Direct pay

Direct compensation refers to the cash compensation an employee receives. This includes an employee's base salary as well as bonuses for vacation or overtime. It can also include performance compensation, e.g. Bonuses for outstanding performance. When people hear the word “compensation,” they usually think of direct compensation.

Indirect compensation

Indirect compensation refers to the other types of compensation that companies can offer besides money. This includes equity investments in the company, such as stock options and profit sharing. Other examples of indirect compensation include paid vacation and sick days, health insurance, workers' compensation, and other non-monetary benefits.

5 Key Components of a Compensation Strategy

1.Salary is still the first step

Salary is the most important component of a compensation strategy, making up the majority of total compensation, while benefits, bonuses, and perks make up the rest of the package (we'll discuss each of these components in the following sections). The salary includes:

• Basic salary (hourly wage or annual salary)
• Frequency of payment
• Planned salary increases, if applicable

Basic salary: Fairness is the top priority

Setting base salary can feel tricky, but the safest bet is to use reliable market data to determine the minimum, median, and maximum salaries for comparable positions. This allows you to set a salary range for each position in your company that is fair and representative of your industry. Of course, you can choose to pay below, at, or above market levels, but that depends on your overall compensation budget and how competitive the candidate market is in your industry.

Without market data, it is all too easy to resort to bias or subjective, unfair standards when setting salary ranges, e.g. by using the employee filling the position to determine the salary range for that position. This approach involves a number of risks, including:

• You could end up offering wages that are not competitive and lose talented employees.
• Likewise, you won't be able to attract good candidates with outdated salaries.
• You could end up paying too much for certain positions.
• You could be held liable for wage discrimination.

With market-based salary ranges, you can ensure pay fairness in all salary decisions and profile your company as an employer who values fair and equitable pay:

• They handle salaries more conscientiously and consistently.
• They can reduce bias in salary decisions.
• You will be better able to explain to your employees how and why they are compensated the way they are.

With data-driven, fair compensation as the foundation of your compensation strategy, your company can make even difficult decisions, such as: adjusting salaries to inflation.

Pay Frequency: How to Support Employees Through Scheduling

If you've already established fair salary ranges, that doesn't mean there's no more wiggle room or that you can improve this part of your compensation strategy to become more attractive to potential and current employees. As we showed above, base salary is only part of an employee's salary.

You can change the frequency of pay, such as implementing weekly paychecks instead of monthly or biweekly, to help employees feel more financially secure. In industries with high turnover and difficulty attracting workers, some employers even resort to paying their employees on a daily basis.

Salary increases: Why it's important to be open about your salary

The key, above all, is to clearly communicate your compensation strategy to employees and applicants - and, most importantly, to tell them how it fits into the bigger picture. Before starting a new job, people expect their new employer to tell them their salary:

• what their base salary will be and how often they will be paid
• how and when they can get a raise

After being hired, or even if someone has been with you for a while, giving them this information will help them become more engaged with their work rather than worrying about their salary. Especially when it comes to raises and promotions, employees want to know that they can grow within your company and that you will invest in their future.

2. Use bonuses and incentives to build in flexibility

Now to another part of the overall compensation package: bonuses and incentives. These can be commission-based or provided as additional compensation outside of the employee's work duties. Here are some common examples of indirect compensation:

• Performance bonuses
• overtime
• Stock options
• commission
• Referral bonuses
• Company performance bonuses

Employees deserve to be fairly compensated for their work, and most will expect some type of raise or additional compensation for their loyalty and performance. This doesn't mean you have to give higher raises than your company can handle or pay employees above market rate. Instead, you can create a sustainable and flexible compensation plan by incorporating various forms of indirect compensation. The company does not commit to paying higher than market wages, but employees can still be motivated through bonuses and incentives.

In times of financial uncertainty, whether due to high inflation or a global recession, financial support for employees becomes increasingly important. Bonuses and incentives can be a good way to ease financial uncertainty for employees while allowing employers to remain flexible in a changing market.

3. Offer benefits that are important to employees

More than three-quarters of American workers believe that companies should definitely provide benefits to their employees. Health insurance is the most important service that you look for in a new company. With healthcare costs rising, companies cannot afford to forego this type of compensation as part of their compensation strategy.

As an employer, you have two options for making benefits part of your overall compensation package.

• Choose which services you want to offer.
• Decide how much you will contribute to your employees' bonuses.

What services will you offer?

In a crowded employer market, social benefits are an important way to distinguish yourself as a company. Services may include:

• Health insurance: Since most employees consider health insurance necessary, the issue is less about what is offered and more about the network of providers, whether employees can accept family members, the cost of premiums, etc.
• Dental and vision
• Health Savings Account (HSA): Offering a matching contribution can encourage employees to better budget for their medical expenses.
• Life insurance
• Retirement: Like an HSA, a matching contribution can encourage employee engagement and support financial planning.
• Short-term and long-term disability
• Mental Health Services: Including an employee assistance program as part of your benefits can provide them with quick, free, short-term support.
• Legal and financial services (e.g. access to free or low-cost legal and financial advisors)
• Child care and family benefits

4. Don't forget time off - why it's an important part of a compensation strategy

In a report from Mind Share Partners, a nonprofit organization focused on mental health in the workplace, 84% of respondents said at least one workplace factor had a negative impact on their mental health in the past year. These were the two most important factors in the workplace:

• Emotionally demanding work (37%)
• Problems with balancing work and family (32%).

While you might not expect work hours to be part of a compensation strategy, the time your employees spend working inevitably impacts their mental health and well-being.

Your compensation strategy can make things better (or worse) for your employees. In other words, your time off policies play an important role in whether your employees feel adequately compensated and appreciated for their efforts, and these policies are therefore critical to ensuring employees have the energy and ability to continue their work.

Leisure includes:

• Paid and unpaid time off
• Paid and unpaid sick leave
• Parental leave

As a company, you must answer three crucial questions about employee release:

• Will you compensate employees for the time off?
• How much free time will you offer?
• What types of waivers will you offer?

Regardless of what you decide, the overarching goal of time off should be to promote employees' work-life balance, well-being and effectiveness in their roles. Current trends in leisure policy show that more balance and flexibility are becoming increasingly important.

• Nearly 70% of employers say they offer or plan to offer flexible work schedules in 2023, ranging from flexible daytime to a four-day week.
• 78% say they offer or plan to offer work from home as a benefit to their employees.

5. Use perks to tailor your compensation strategy to your employees

The needs of all employees in your company cannot be satisfied with a uniform compensation strategy. Perks allow you to tailor compensation to each employee in your company and tie your compensation strategy to areas that both the company and employees value. Perks can also be a way to differentiate your company culture from others.

Benefits have a wage-related value, while benefits are offered in addition to wages and can cover something that employees would likely have had to pay for themselves. As always, keep your employees in mind and choose offerings based on their specific needs.

For example, if health and well-being is important to you or your employees, your company can offer discounted or free gym memberships while also ensuring regular lunches together. Your company may also have a lot of employees with young families, so offering discounts or memberships to nearby children's attractions could have a big impact.

Here are some other ideas for perks you could offer:

• Benefits for commuters
• Corporate events
• Subsidy for cell phones
• Home office subsidy
• Company vehicle or fuel card
• Holiday pay
• Employee Resource Groups
• Pet friendly options
• Support with tuition fees and further training measures

Next steps: Upgrade your compensation strategy

Each of these components is critical to developing a competitive compensation strategy that will guide your company both now and in the future.

Focusing on what's important to your employees and ensuring they understand how your compensation package benefits them will be a crucial factor in why employees come to your company - and why they stay.

A robust compensation strategy is essential for attracting and retaining top talent. IceHrm simplifies the execution of your compensation strategy by centralizing policy documentation, performance management, and payroll, offering a unified experience for your HR processes. Elevate your compensation strategy with IceHrm's award-winning HR software.