Compensation issues that don’t get addressed early on—or better yet, prevented altogether—can snowball into massive problems later. This list includes common compensation issues small businesses face as they grow, which is why we addressed them before year three.
1. Evolving Job Descriptions
Young companies often experience a similar problem: They struggle to define roles. With fewer employees available to complete all tasks, most workers end up responsible for jobs that other people would do in larger companies.
That can make writing accurate job descriptions difficult, leading to challenges when creating fair salaries.
Out-of-date job descriptions usually provide a few warning signs, including:
- There’s task overlap between employees
- Employees are becoming burnt out
- Your job postings aren’t attracting the right kind of people
As a growing company, it’s crucial to update job descriptions frequently as roles evolve. While bigger companies can usually stick to annual reviews, you might find that quarterly updates are necessary.
HR is usually in charge of this process, but if you don’t have an HR team yet, it falls on the shoulders of the owner or managers.
One of the best ways to gauge what should be included in each job description is to observe employees over several days. What tasks do they perform that should be a part of their job? Is there anything extra they’re doing that isn’t currently in their job description? What tasks could be shifted to another role?
You can also compare your current positions to similar ones in other companies, using competing descriptions as a guide for your own. Just make sure that the companies you’re comparing are about the same size as yours.
2. Hiring Workers in Other States
I absolutely love having a company full of remote workers. Our employees can work wherever they want without dealing with the potential confines of an office.
But with workers scattered across the country, compensation can become muddled. Each state has its own tax laws and employment rules you have to follow. Each state agency even goes by a different name, so there’s a lot to remember and several moving parts to juggle.
Plus, if you need to let an employee go, you must deal with the right agency in that employee’s state, which, of course, operates differently than other state agencies.
While hiring workers in other states as a younger company is fine, I recommend really grasping all that it entails before doing so. Hiring an HR expert right off the bat is one of the best ways to make sure you’re getting everything right for each employee.
We hired a part-time HR person when we reached 10 employees, and they became such an invaluable resource for the team. Once we grew to 20 employees, our HR person went full time.
My only regret is not starting them at full time, even with just 10 employees on the roster, to help manage all the behind-the-scenes stuff that goes into having remote workers on the team.
3. Exceeding a Payroll Budget
Payroll is a necessary expense for a business, but if it isn’t being tracked and managed properly, it can quickly get out of hand. A payroll budget can keep compensation in check, but only if your company is strict about using it.
A payroll budget defines how much your company should spend on payroll. If you’re consistently going over your budget, you might have inconsistencies in your compensation, like not sticking to allowed bonus amounts or not accounting for enough wiggle room in employee compensation for taxes and benefits.
I know from experience that having a complicated payroll budget can be difficult to stick to. Just looking at it can be overwhelming, and if it’s confusing to navigate, people might shy away from using it altogether.
That’s why I prefer a simple payroll budget that’s easy to understand and update. The one we use at Stone Press is as straightforward as it gets, using a spreadsheet and an easy 25% method to account for taxes and benefits, like PTO and health insurance.
Make sure anyone in charge of payroll, whether that’s HR or management, understands the budget and the process of alerting the right people if something’s off with the budget. Most importantly, remember to review and update the budget every year.
4. Negative PTO
Whether you offer a lump sum or accrual PTO, your employees have a set amount they can use. Even many companies with unlimited PTO have some boundaries for time off.
When an employee uses more PTO than they’ve earned, they wind up with negative PTO. Accepting a PTO request that puts an employee into negative PTO may not seem like a big deal on the surface, but it can turn into a major compensation issue quickly.
Think about it: One person goes four hours over on PTO. Then, another employee learns that negative PTO is possible and puts in a request for a week-long vacation, using eight additional hours they haven’t earned yet. Soon, you may end up with another 5-10 employees doing the same.
Each time PTO goes negative, your company is technically paying for that borrowed time. To keep compensation on track, the company needs to get that PTO back.
Some companies choose to deduct the negative PTO from an employee’s paycheck, but not all states allow this to happen. The other option is taking future PTO an employee earns to pay back the negative balance.
Neither option is a great one for the company or the employee. It’s best to, in most cases other than emergencies, deny negative PTO requests altogether.
5. Veering From a PTO Policy
A PTO policy should be detailed enough to not leave gray areas for employees to decipher on their own. Clear boundaries are necessary to ensure that each employee uses PTO as it was designed and that the company provides PTO as promised.
It’s important not to stray from this policy, as evidenced by the problems I just mentioned with negative PTO.
Your PTO policy is in place for convenience and simplicity for employees and the company. But it’s also in place for legal purposes. Each state defines its own PTO laws, and carving a different path toward PTO could result in hefty issues down the road with the law and with compensation.
Unclear PTO rules can lead to inconsistent accrual systems, inaccurate cash outs, and messy PTO request processes, all of which can affect your compensation planning and management.
Once your PTO policy is in place, give a copy to everyone, post it in the office, or do whatever you need to ensure that the company stays accountable for following it.
6. Skirting Proper Onboarding
Researchers from Brandon Hall Group found that a solid onboarding process can improve employee retention by 82%. Better retention means lower turnover.
Turnover is one of the biggest drains on company compensation. Every penny you spend on turnover eats into your revenue in other ways, including payroll. And, because turnover can cost a company thousands of dollars per year, high turnover is not something to play around with.
A dedicated employee onboarding process can give new hires the tools and knowledge they need to feel comfortable with their new role and your company. An onboarding system is a necessary investment to reduce costs in the future, especially as your business scales.
7. Hiring Too Many People
Fast-growing companies sometimes overhire in their early stages to meet escalating demands.
This usually doesn’t work out well, though. Eventually, growth is going to slow, plateau, or even decline. Meanwhile, your company is stuck trying to figure out how to make room in the budget for your growing payroll that’s moving faster than your revenue.
Forecasting your company’s staffing needs can be tough, but it’s important not to get ahead of yourself in the beginning by overhiring.
Instead, think about ways to have your current positions evolve to include a few more tasks. Even if this means a pay raise (and it should!), the company can still save money over hiring a whole new person.
Working with contractors works well, too, for filling in gaps. Contract freelancers with specific skills whom you can request work from as needed rather than having a part-time or full-time person on payroll.
Be sure to account for contractor pay in your payroll budget.
8. Lack of Pay Transparency
When employees get left in the dark about how their company determines their compensation, they could lose trust. Employees have the right to understand their salary ranges and how their specific salary has been set, such as how their performance or skills play a role.
Additionally, a lack of pay transparency can lead to pay inequity. If a company is okay with avoiding compensation conversations, it might also be okay with significant pay disparities among employees in similar positions.
Your company can avoid this through open dialogue with all employees about compensation. Each year, provide an updated compensation policy to workers detailing how base salary and salary ranges are determined and opportunities for pay increases.
Also, open the door for workers to request meetings at any time should they have questions about pay.
9. Not Addressing Perceived Equity
Perceived equity is how employees feel about their pay. Even if you pay at or above market rate, it’s ultimately your employees’ opinions of their pay that matter most.
For example, if Paul gets paid $100,000 a year for a job with a market midpoint of $90,000, he’s getting above-average pay. But, if Paul feels he doesn’t get paid enough, he might feel tension and unhappiness at work. He might even start looking for another job.
Again, having clear communication with employees about their pay and establishing an open-door policy to discuss pay can help address perceived equity.
However, if multiple employees have issues with their pay, there’s probably a deeper problem to address. It may signal other issues, like outdated job descriptions, past-due compensation reviews, or the need to hire more employees to lessen the load.
10. Skipping Compensation Planning
Compensation planning should be a top priority for almost any business. Compensation evolves as a company grows, and planning ahead of time makes those changes easier to navigate when the time comes.
Compensation planning includes everything that goes into making compensation decisions, so HR and executives should take part. Also, the process should address every compensation issue I’ve mentioned in this guide, such as avoiding negative PTO or detailing the company’s onboarding process to enhance retainment.
11. Doing It All Yourself
Compensation management is a massive task that one person—and even one company—shouldn’t try to handle without help.
I advocate for using a payroll service because I know how much time and stress it can save. Payroll services help with everything from actual paychecks to tax and benefits management. There’s no reason to take on all these responsibilities when payroll services are there to help.
Several services even integrate into your HR management system seamlessly to keep all things compensation together.
The most important thing to remember regarding compensation is to take control of compensation before it becomes an issue. Each problem I’ve discussed here is avoidable with the right tactics in place.
Implement strategies now, and by year three, your compensation management should be mostly smooth sailing.
