Employee Compensation: How to Get Started

How do I determine what’s a fair wage to pay my employees? 

Providing a competitive wage can be essential to attracting top talent—and keeping them. However, compensation rates can vary greatly within the retail sector depending on location, skillset, and level of experience. 

First, make sure you understand what the minimum wage laws are in your city and state by using the U.S. Department of Labor’s interactive minimum wage map. (For additional legal detail on the types of employees and their compensation, The Balance’s What is an Hourly Employee? provides helpful detail about employee classifications and the difference between exempt vs. non-exempt employees.) 

Next, find out what’s considered competitive compensation for your employees in your industry and city. A Living Wage is considered the gold standard of fair wages because of the quality of life it enables wage earners to attain. You can also check out Salary Comparison: How to Know If Your Small Business is Paying Fairly—a step-by-step resource for small business owners to guide employee compensation, including interactive salary comparison tools like this one from Indeed.

After going through this process, if you see that your employee wages are below industry standard, the next section (What steps can I take to increase employee wages?) is a great starting place to identify tactics to help you boost compensation. If you confirm your business is paying a competitive hourly wage—that’s great! We encourage you to consider the benefits of investing in your workers listed below and see if you can continue to move the needle on employee compensation, ideally toward a living wage. 

What is a Living Wage?

What steps can I take to increase employee wages?

Most small business owners want to pay their employees as well as they can. However, implementing wage increases takes planning, including weighing costs and benefits. 

When deciding how compensation increases could work at your business:

• Start where you can. Find out the median wage in your area and industry to better understand if you’re paying staff a competitive wage. Indeed’s salary tool is a great resource for wage benchmarking and can be filtered by city and state. 
• Be careful of only raising the floor. Raising the base pay of only the lowest-wage workers can lead to “wage compression,” where entry-level staff may earn the same amount as those with more work experience or higher levels of responsibility. When wage compression occurs, veteran staff members can feel that their additional responsibilities or long-term commitment to the company aren’t being recognized, negatively impacting morale and employee retention.
  • Instead, it’s helpful to maintain some space between pay ranges. For example, if you can afford to raise wages, try bumping up all wages by the same percentage. Alternatively, a lower-cost solution could be implementing a cascading increase where the lowest-paid employees receive the largest percentage bump and more highly-compensated staff members receive a slightly smaller percentage wage increase. 
• Remember that it takes time. Even if you can’t afford to pay everyone what you’d like immediately, it’s important to map out your ideal levels of employee compensation over time to ensure it’s an objective you’re working toward in your business plan. It’s helpful to set goals, establish timelines, and openly communicate with staff about which steps you plan to take toward paying higher wages. Furthermore, setting clear expectations around career progression and associated pay increases can give your employees extra motivation to stay with your business and work hard. 
• Remember schedules impact take-home pay, too. Both wage and schedules matter for stable pay. If you can raise wages and provide stable and adequate hours for workers, they will then have a stable base for their financial life. If you pay well by the hour but offer unstable schedules, where employees may get 25 hours one week but only 10 the next, it will still be hard for people to make a living. So make sure to look at the numbers of hours each employee works per week over a 3+ month period and see how variable it is and if they are getting the hours they want. If not, the Scheduling section offers ideas on how to provide more stable schedules. For helpful perspective, the New York Times has a great article highlighting this challenge for workers.

Below, we’ve listed a few tactics you can use to make a wage bump more financially feasible at your business: 

• Decrease employee costs in other areas.
  As a first step, it’s critical to understand what your employees value the most—is it health benefits, a higher wage, a matched retirement plan, stable schedules, or discounts and transportation subsidies? If a wage increase is the top priority, you can make an informed decision, in conversation with your staff, about which benefits, if any, could be scaled back to accommodate a wage hike. Perhaps your staff prefers to use your state healthcare programs if it means your health benefits expenses could be redirected toward higher compensation. By moving to 100% direct deposit, businesses can save upwards of $3 for every check not cut, which can add up over a year to create significant savings. By moving to direct deposit, you’re also providing a more secure and convenient payment method for your employees. 
• Get employee buy-in on increasing sales targets.
  Increasing sales targets can be an effective tactic to help your business afford providing a higher wage. Every employee knows that you want your business to make more money, but it’s critical to communicate to your workers that receiving a higher wage is directly tied to their ability to support the business in increasing its sales numbers. Helping employees understand how their actions impact business decisions and compensation can drive collective motivation toward meeting your sales target. You can also boost employee ownership of this goal by brainstorming as a team on strategies to increase sales, and assigning employees specific tasks to help the business reach its goals. They can help generate additional traffic through customer and community outreach or social media, talking to customers about what other products or services they would like, and more. This kind of employee engagement builds team ownership and skill sets for your employees while driving new ideas to boost sales, a win-win. 
• See if other business expenses can be cut.
  Other means of cutting expenses can include going paperless, sourcing cheaper supplies, monitoring your store’s energy efficiency, pooling resources with other business owners on purchases, and keeping track of tax write-offs. Your employees likely see cost savings opportunities too—from activities that waste their time to products that don’t sell well to high shrink items to how to decreases damages and waste. Engaging your employees in saving money and time can improve your bottom line, make their jobs more interesting and build their business skill set. 
• Hire with an eye to increase productivity.
  As compensation increases, so can standards for employee productivity and performance. If you hire with a focus on employee performance, employees’ higher productivity can enable you to hire fewer workers, pay them higher wages, and retain them for longer. 
• Increase your prices—and be transparent about it.
  Retailers across the country, especially in the clothing and food sectors, are raising prices to help cover the cost of increased employee wages— and they’re being open about it. National chains such as Sweetgreen have posted notices publicly explaining that increases in staff compensation and benefits are driving the bump in salad prices. In a different tactic, clothing retailer Crossroads Trading Company now charges a two percent surcharge on all purchases to cover the cost of increased employee wages, and makes this information public throughout the store. Studies have shown that consumers are willing to pay more for great customer service. Consider your customers and current pricing to determine if a price increase or surcharge could be appropriate for your business. For additional guidance, see Tips for Raising Your Business Prices. 
• Streamline operations.
  Consider your current staffing model and operating hours—do you need the current number of employees to cover all shifts? Are there certain low-traffic hours you could cut down and thereby lower personnel costs? Also consider narrowing your product offerings to simplify operations and streamline employee responsibilities. For more detail on how this works in practice, check out Why Companies That Pay Above the Minimum Wage Come Out Ahead. The Good Jobs Strategy also provides additional detail on how to optimize your operations. 

If you’re considering making changes to staffing, hours, or benefits be sure to consult the Small Business Administration’s guidance, “Understand the Law Before Dropping or Reducing Employee Benefits.” 

If you work through this section and it turns out that increased compensation doesn’t work for your business, also consider other potentially less costly ways to support your employees and foster loyalty. Implementing these programs and benefits plans can help indirectly boost the value of employees’ total compensation. Options include offering other benefits, such as health insurance, retirement plans, or paid time off and more stable scheduling.