Small Businesses Raising Pay to Court Scarce Talent

Small Businesses Raising Pay to Court Scarce Talent

Wages at small businesses in the US are beginning to grow at a pace more common to larger companies, the Wall Street Journal’s Ruth Simon reported last week, driven by increasing demand for talent as well as the impact of pay transparency websites like Glassdoor and PayScale. An analysis of ADP data by Moody’s Analytics found that average raises at companies with fewer than 50 employees stood at 1.07 percent over the past three years, significantly more than the 0.69 percent average increase the analysis found for firms of all sizes.

Small businesses have found it necessary to offer more competitive pay packages both to attract new talent and to keep their current employees from getting poached by larger and wealthier firms. Employees, particularly younger workers, also have a better sense of what kind of compensation they can expect to earn with their skills and experience, and are not shy about demanding the pay they think they deserve.

The problem, Simon adds, is that these smaller companies tend to have fewer resources to work with overall, so increases in employee compensation tend to be balanced by cuts in other investments, such as equipment purchases or upgrades. This likely exacerbates the inequality between smaller and larger firms, as companies with larger war chests are better able to pay top dollar for in-demand talent while also investing in other aspects of the business.

Organizations with relatively less competitive pay are always going to face challenges in bringing in top-tier talent that can attract a high salary. For those that can afford to raise pay, it’s certainly one way to try to attract talent, but organizations that don’t necessarily have the budget to compete in this regard might be better off using lower-cost but high-impact benefits as attractors.

Understanding the needs of current and future talent and tailoring total rewards offerings to align to those needs can be much more effective than trying to compete on pay based on the market alone. Our research at CEB (now Gartner) has produced a range of insights into how organizations can maximize the cost-effectiveness of their total rewards strategy. CEB Total Rewards Leadership Council members can read our full guide on designing pay plans to maximize attraction and retention, while CEB HR Leadership Council members can check out our insights specific to the needs of midsized firms.