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Salaries and Small Businesses

How small businesses get in trouble with high cost of payroll

No doubt payroll is a big expense. What I’ve noticed working with small businesses is that they tend to give higher raises IF they give any raises at all.

How to understand payroll and salaries for small business

Here’s the problem:

Small businesses tend to think in increments of $.50 or $1.00. Here’s a typical way it goes down:

  1. Employee is hired at $10.00 per hour to do an entry level customer service job.
  2. 6 months later, the employee does a really great job – gets a new customer or seems to be catching on really well – or even better is starting to save you a lot of time. So, you give the employee a raise. Now the employee is making $10.50 per hour.
  3. Next thing you know, the employee has once again hit a home run – you are feeling really appreciative and it’s been 6 months since they had a raise, so you decide to give him/her another raise. Now they are making $11.50 per hour.
  4. A couple more years go by and you realize that you have not given this employee a raise for a while and they are still doing a good job so you decide to bring them up to $13.00 per hour.
  5. Over the next 3-5 years you continue in the same vain giving her/him bumps in salary on days when business is going well and you’re feeling generous and now the employee is making $18.00 per hour. The job has not changed in all this time but the salary has not doubled. Really? Are they worth twice as much to your business as they were when they started to work? Maybe so, maybe not. Your resentment toward how much money this employee is making begins.

Believe me, this is not the way Corporate America does business. They give 3-5% increases annually. Here’s how that would look using 4% increases annually as an example.

Year 1 – $10.00

Year 2 – $10.40

Year 3 – $10.82

Year 4 – $11.25

Year 5 – $11.70

Big difference huh? So if you are the employer who is giving the raises when you feel generous, STOP! Consider this:

Give bonuses, smaller ones like $50. Employees won’t feel the appreciation or love any longer whether you give a bonus or increase their pay. The problem with the pay increases is that you’re stuck – if business is in a downturn you’re stuck with that employee at that salary. The only way to change it is to lay the employee off and hire a new employee back at the $10 per hour.

Have annual performance reviews and consider increases closer to the Corporate America version. Most of all, base the salary on their performance, completing their goals and ultimately their value to the company. That will significantly reduce the resentment factor

Consider a cap on the salary for a job that will never really be worth $20 per hour. If you have an employee who works hard, does their job but never really wants to grow or take on more responsibility you can cap the salary so that you don’t’ end up paying more than the job is worth. You can still give bonuses but you don’t’ get yourself into a situation where you’re paying way too much for that job.

If you are one of those employers who feel like you hired the employee at a fair salary 5 years ago and have given bonuses along the way but never raised their pay rate, that is not a good idea either. That employee is at risk for getting picked off by another company offering more money. Again, the employee does not remember the bonus you gave them at Christmas – which was the same as everyone else’s by the way – they just compare their pay rate with the other company. You lose! You lose the employee who may have been doing a great job but you’ve failed to let them know and reward them.

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