Pay and benefits: being competitive

Gary Cookson discusses why pay and benefits are important for small businesses. Here are the key things you should consider to ensure your rewards offering is competitive.

In a small business, the importance of getting pay and benefits pitched at the right level is crucial, yet for many, it’s difficult to achieve. For most of us, the path to success is often littered with mistakes and lessons learnt; the same can be said for small businesses as they develop and grow. If a business is in its infancy, it’s unlikely to have an HR professional to guide their pay and benefits approach. Most small businesses only make improvements to their rewards approach when a key member of staff leaves, but this is problematic. 

When key people leave a small business, they leave a proportionately bigger hole than in a larger business, so the impact of turnover driven by poor reward practices is that much bigger as a result.

It’s also difficult because of the economies of scale that simply aren't present. Many small businesses feel hamstrung by resource limitations and struggle to think of ways to reward staff, if they can’t afford to increase their wages.

For start-ups, pay and benefit approaches are likely to be one of the lower-level considerations in their first year. What takes precedence is the ability to survive and then grow from there. But, is it all about the tangible rewards? 

Tangible vs intangible rewards: knowing the difference

Many of you will have some understanding of motivational theory and may have come across Herzberg's model. Herzberg's ‘Two Factor Theory of Motivation’ has two categories: ‘Motivators’, which can on their own (and unless outweighed by dissatisfaction with Hygiene Factors) motivate people to perform better, and ‘Hygiene Factors’, which are things an employee must feel reasonably satisfied with in order to perform but which won't motivate them to perform better. Interestingly, salary and working conditions appear under ‘Hygiene Factors’, and most of the items listed under ‘Motivators’ can be considered part of an intangible pay and benefits offering.

In summary, it’s important you focus on the intangible benefits (AKA ‘Motivators’) as these are intrinsically linked to job satisfaction and staff retention. That said, this doesn’t mean you should neglect the more tangible benefits (AKA ‘Hygiene Factors’) altogether.

When you come to design the aspects of your reward package, both tangible and intangible, you may also consider the ‘Expectancy Theory’ by Vroom. This approach suggests working backwards from the tangible or intangible rewards; if these are desirable to the individual(s) and they can see how their level of performance will impact their receipt of these rewards, they ought to be motivated to perform.

What are your competitors offering?

When it comes to rewards and benefits, do you know what your key competitors in the market are offering? It’s vital you remain desirable as an employer and have a competitive reward scheme. How do you check this? Some consultancies can help, but equally the internet is a huge and expansive resource that can provide you with all the knowledge you need. Additionally, intelligence gathered via employees and external candidates who apply for positions with you will be really important in determining if you’re competitive or not. Precisely what competitive means will be highly situational based on your organisational context, and reflective of your overall strategy too. Here are my seven top tips for getting rewards right in a small business:

  1. Stay compliant – there are certain things you MUST do in terms of pay that are set out by legislation, around National Minimum Wage (etc.) and Equal Pay, but also around various Statutory Pay elements plus things like Auto Enrolment. Ensure you are meeting these minimum requirements.

  2. Reflect your competitive advantage – if as an organisation you want to be known for Cost Leadership, your pay and benefits will need to be fairly basic. If you want to be known for Quality, the opposite is likely to be true. If its Differentiation, you may want to reward behaviours that encourage this.  Basically, Rewards and Business Strategy should be in alignment if either is to work.

  3. Think long term - if your strategy is for growth, you’ll want a very attractive rewards package that encourages people to work for you. If you’re in a decline, the opposite may be true. Whatever your strategy is, consider what this means for your package and ensure that one doesn’t prevent the other working.

  4. Tailor the rewards – this is easier said than done, but surprisingly achievable in small businesses. Talk to your staff about what they would value (consider the Vroom theory as mentioned above) and craft a package that is going to motivate and retain them. This may mean being vague in job adverts about salary details, but flexibility is the key here, as is transparency about the approach. As we know from Herzberg’s theory, salary is not the motivator we think it is, and many will want more intangible aspects that cost little.

  5. Collaborate – there may be other similar businesses who you could join forces with or business clubs (think local Chambers of Commerce etc.) to benefit from economies of scale – jointly administering parts of your rewards and negotiating discounts with suppliers etc. It needn’t be out of your reach as a small business to offer much of what large businesses do.

  6. Be mindful of culture – think about the behaviours you want to encourage and reward in your workplace, and think carefully about whether the pay and benefits you offer do that. Sometimes they can encourage the opposite, so use rewards to drive and create the culture you want.

  7. There's no end game – there isn’t a badge you get when you’ve got the perfect rewards package, because such a thing isn’t possible. You never win at this game and shouldn’t view any package you have as a final version. It’s something that will continually evolve, as people join and leave and the business context changes. Don’t be afraid of making mistakes, learn from these and improve.

Author: Gary Cookson (a father of four, husband and CIPD Chartered Fellow) runs his own business called EPIC, which helps people and places to Evolve, Perform, Improve and Compete.


Explore related resources

These areas of the People Skills Hub will help you to address some of the issues covered in this blog:

  • Pay and benefits: Guidance on ensuring you offer your staff the right pay and benefits package
  • Learning and development: find out how to plan learning and development opportunities to improve your employees' capabilities, skills and competencies
  • Performance management: learn how to improve and develop your employees' performance and how to align their goals with your business objectives
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