How Compensation Impacts Culture in Small Businesses

This is an excerpt from our 2017 Compensation Best Practices Report (CBPR): Small Business Edition. As we celebrate Small Business Saturday in the U.S. on November 25th, let’s take a look at compensation’s impact on company culture for small businesses. Get the full report here.

Culture is where small businesses shine. Small organizations often understand the importance of having people who are committed to the organization. They are aware of the value exchange that goes on between employer and employees and do their part, which is why 50 percent of small organizations say their employees feel they are paid fairly, versus 44 percent of all organizations.

In this year’s report, we found some strong links between culture and compensation. Those connections were especially prominent when it came to engagement, performance, communication and training.


Small organizations are much more likely to measure employee engagement on an ongoing or real-time basis: 27 percent of small organizations use ongoing measurement versus 19 percent of all. They are much less likely to use annual engagement measurements (22 percent of small versus 32 percent of all).

Almost half of small organizations (48 percent) believe compensation drives engagement. That said, only 24 percent have changed pay as a result of employee engagement feedback and another 12 percent don’t ask about pay. Twenty-one percent say that pay never came up as an issue.

Whatever they’re doing it seems to be working, as 70 percent of small organizations say their employees feel appreciated at work versus 64 percent of all organizations.


While smaller organizations may not always be quick about evaluating market values for their jobs, they are more likely to keep tabs on employee performance. Smaller organizations are more likely to evaluate performance on an ongoing or real-time basis (13 percent versus 10 percent of all) and less likely to wait a year to review performance (59 percent versus 64 percent of all). That said, 10 percent of small organizations do not conduct performance reviews versus 7 percent of all orgs.

Evaluating performance frequently can help small organizations by providing the information employees need to create better results. When they do, small organizations do a fairly good job of rewarding and recognizing that performance through both monetary and non-monetary means.

Communication and Training

Finally, studies have found that the way people communicate compensation is almost as important as the compensation itself. Small organizations do a great job of communicating, which is part of what puts them ahead in the engagement game. Increased communication builds both trust and buy-in for employees — 64 percent of small organizations agree that employees have a great relationship with their direct managers versus 57 percent of all organizations. And small organizations are more likely to have regular communication between employees and managers: 71 percent of small organizations agree that there is frequent two-way communication between employees and managers versus 63 percent of all.

Organizations have choices about what and how they communicate about pay. Often companies hesitate to be transparent with their pay decisions because they believe pay transparency is all or nothing. Actually, there’s a whole spectrum of choices organizations can make about what types of pay-related information to share with employees. Thirty percent of small organizations are currently transparent (three or more on PayScale’s five-point pay transparency spectrum). But fully half of small organizations said they plan to be transparent in 2017.

One of the easiest and most tangible ways of introducing transparency into the organizations is providing total compensation statements for employees. Total comp statements detail all expenses that the organization assumes on behalf of employees, including base pay, bonuses or incentives, benefits and perks. Right now, 38 percent of small organizations provide total compensation statements to employees. Frankly, after all the expense involved in paying employer health insurance, it makes sense to ensure employees know the value of their benefits.

Small organizations don’t typically have layers and layers of hierarchy, given they have fewer people. So it’s not especially surprising that, in small organizations, CEOs are more involved in all aspects of compensation than in larger orgs.

At the same time, function managers are less involved in all aspects of compensation than in larger organizations. It’s curious that more managers aren’t communicating compensation in small organizations, given that smaller organizations are more confident in their managers: 26 percent of small organizations say they are “very confident” in their managers’ abilities to have tough pay conversations with employees (versus 19 percent overall).

Inevitably, some employees will go to their manager and ask questions about compensation decisions. When managers are less involved in compensation, it’s harder for them to provide the appropriate rationale for pay. Eventually that leads to the common answer “I don’t know, go ask HR” or “go ask the CEO.” Only a quarter of small organizations offer manager training (versus 30 percent of all). Ideally, small organizations would start up-leveling their managers’ knowledge and begin preparing them now before the organization starts to grow and the stakes get higher.

Want all the details on what other small businesses are doing for compensation? Grab your copy of the 2017 Compensation Best Practices Report: Small Business Edition today!

Tell Us What You Think

How does your organization stack up against this data? We want to hear from you. Tell us your thoughts in the comments.

Image: JD Hancock/Flickr

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