What Small Business Can Teach Us About Employee Compensation

Hourly small businesses wages surged at the end of 2019. At a time when the hiring market is tight, bigger businesses might consider following that example. The right employee compensation package can support a robust Talent Optimization strategy. This, in turn, helps your organization achieve its strategic goals, but only if the decision is based on data.

As unemployment hovers near record lows, it seems that every business leader faces the same challenge: hiring and keeping the right talent. The basic laws of supply and demand would suggest that as unemployment falls, wages should rise to help businesses stay competitive. That hasn’t happened. At least, not in most sectors and not fast enough. Since the 2008 recession, employers have remained conservative when it comes to employee compensation. The share of corporate income that is passed on to workers has remained small, well below pre-recession rates.

However, some businesses are recognizing the disconnect and acting to correct it. Hourly small business wages rose in fits and starts throughout 2019, with an overall growth of 3.07 percent according to a Paychex report. Interestingly, weekly hours worked rose at the same time. In fact, weekly hours worked hasn’t seen this level of growth since 2012. That means employers increased their overall labor investment on two fronts.

At first glance, this seems like a risky strategy. Employers are increasing their cost per hour even as they must pay for more hours. However, in the right circumstances, this can be a wise investment. Rewarding employees who meet rising demand creates a culture that rewards desirable behaviors, which is a key element of Talent Optimization.

Businesses that use Talent Optimization rely on people data to help them understand job requirements and identify the best candidates for the job. They can then manage employees and teams to achieve business goals. Under this model, compensation, benefits, goals and rewards all align with the overall business strategy.

Compensation as a Talent Optimization Strategy

You may choose to raise wages for different reasons throughout the Talent Optimization process. Doing so can help you meet people goals, build a culture where employees feel valued, and attract and hire top talent. It’s not the only strategy that can achieve these objectives, but it is the right fit for some businesses.

The four key elements of Talent Optimization are:

  1. Diagnose: Measure and analyze critical people data as it relates to your strategic goals. Prescribe remedies for any area where you identify weaknesses. For example, if you’re experiencing low employee retention due to employees seeking more lucrative jobs, higher wages may be a viable remedy.
  2. Design: Create a people strategy that matches strategic goals. Many employers let culture evolve on its own, which can lead to undesirable results. With Talent Optimization, you can create a culture that fits your strategy. For example: if you want employees to feel like valuable members of the team, you might raise wages.
  3. Hire: Bring in new talent and build cohesive teams based on your strategy and data. If you’re truly seeking high-performers, you need attractive compensation. Raising your wages to match or exceed the competition might be the right choice.
  4. Inspire: Maintain your organizational culture and manage people. As roles evolve and job responsibilities shift, compensation and other cultural influencers should adjust as well. If employees are being asked to do more, like the small business employees asked to work more hours, they should receive compensation that reflects the new demand.

More than wages

Raising wages can help you remain competitive, and even stand out, in a tight labor market, but it’s not a panacea. Even if the data indicates high turnover or that employees feel undervalued, it’s important to identify the source of these issues. Wages might be the root of the problem, or they might be a negligible factor.

Are middle managers minimizing employee contributions? Are staff being asked to fill roles and complete tasks that are outside their skill sets? Does your company fail to recognize a job well done? All of these situations cause the same symptom—employee disengagement, but each requires a different remedy. Simply raising wages in these cases won’t remove the problem at its root.

Like any decision you make in your business, the choice to raise wages should be based on data, not on subjective factors. Dig deep into the data to understand motivations rather than just recognize surface patterns. Use surveys, observation, and statistics to understand not just how employees feel about your culture, but why they feel that way.

In short, raising wages sounds like a good idea. It might even be a good idea, but only if you do it for the right reasons. Base your decisions on data. Make changes with a clear strategic objective in mind. Only then can you reap the full benefits of Talent Optimization.