According to a 2016 Entrepreneur article, the average profit margin for a small business from 2014 to 2015, regardless of industry, had a profit margin of 7.2 percent. With margins that tight, small business owners can’t allow their overhead costs to become too high, or their operations will collapse. However, founders should also be aware of the fact that if they don’t compensate their most valuable employees properly, they’ll lose them and all the revenue they could generate. To make wage increases that balance both of those concerns, small business owners need to understand three key factors.
When making wage increase decisions, owners need to know what other businesses are paying their workers. Small Business Trends notes there are several compensation databases that founders can use to get this information. It’s also a good idea for owners to look at the Glassdoor pages of leading companies operating in their industry, as it’s probably the first place workers will look when assessing their career options. With this information in hand, owners can take steps to keep their employee retention rates high.
Cost of living
Understanding the cost of living, both in the area that your business operates and in the United States as a whole is very in important when contemplating wage increases. If a business isn’t paying its full-time employees enough to meet their minimum needs, that company won’t attract or retain the best workers. And since a small business’s success is dependent upon the efforts of a small group of A-plus players, an up-to-date knowledge of cost of living changes is mission critical.READ MORE: Woman Critically Injured In Minneapolis Shooting
Long-term financial outlook
Any employee wage increases will have a big effect on the company’s operating expenses. Consequently, owners should have a clear understanding of the business’s long-term financial outlook. If their financial picture indicates that they can absorb the added payroll costs without much difficulty, then a wage increase won’t be a much of a problem. If a company’s financial forecasts are less robust, wage increases would be inadvisable.
Instead, owners should consider offering benefits to employees in lieu of pay bumps. A recent Glassdoor study found much of today’s workforce derives a greater level of satisfaction from health insurance than any other type of benefit. Since employer contributions to health insurance premiums are tax deductible, health benefits might serve as a cost effective alternative to wage increases.
This article was written by Mario McKellop for CBS Small Business Pulse.