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Employee Compensation and Small Business

The Great Recession reinforced the importance of business profitability as it relates to compensation, with small employers quickly slashing wages and benefits to survive during the downturn and gradually reversing course when profits improved. Employee compensation is one of the most—if not the most—important points of negotiation between employers and employees.

Employers offer and negotiate compensation plans using a variety of wage structures and benefits to attract candidates for open positions and to retain employees. Small employers offer compensation plans that account for the unique and varied characteristics of their business. These characteristics include industry, size of business, and years in operation, to name a few, although none are as important as business profitability.

The metric of salaries as a percentage of operating expenses for businesses

across all industries and size groups is 41 percent

PPT Editor’s note:

Based on the metric above (41%), if an associate is paid $20.00 per hour in direct wage, the company must charge $49.00 per billable hour. For professional painting businesses, the range is 2 to 3 times the hourly wage. Using the $20.00 per hour wage, the billable hour range is $40.00 to $60.00 per hour. Companies (1-19) usually incur a higher billable hourly rate ($50.00+), while paint and application businesses with 20 -250 may be able to be profitable at $45.00 per billable hour (based on an average hourly wage of $20.00).

As an expense category, employee compensation is one of the largest for businesses, and it is therefore closely monitored. According to the Society for Human Resource Management, the metric of salaries as a percentage of operating expenses for businesses across all industries and size groups is 41 percent. The large percentage share that employee compensation constitutes of key income statement benchmarks like operating expense and gross profit makes the evaluation and examination of employee compensation critical to understanding the operations and health of a business.

The following information is based on a 2016 nationally-representative survey on employee compensation at small businesses, defined here as employer firms with fewer than 250 employees.

Financial Compensation for Full-time and Part-time Employees

Employee compensation takes many different forms. When thinking of compensation, the type that most frequently comes to mind is cash, which may take the form of salaries, wages, commissions, or income received via a profit-sharing arrangement. There is considerable variation in how employees receive the pecuniary portion of their compensation, depending upon whether the employee is employed on a full-time or part-time basis as well as upon the size of the employer (as defined by the number of employees working at the business).

Among small firms, the prevalence of salaried employees as a majority share of full-time employees tends to decrease as the size of the business increases. Thirty-five percent of firms with one to nine employees report that a majority of their full-time employees are salaried, compared to 28 percent at firms with ten to 19 employees, and 14 percent at firms with 20 to 249 employees (Table 1 and Q#2). The prevalence of hourly full-time employees as a majority share of full-time employees also varies with firm size, but not in a monotonic fashion.

Forty-two percent of firms with one to nine employees report that a majority of their employees are paid hourly wages (Q#3). This percentage is slightly higher than the share of firms with ten to 19 employees (39 percent), but considerably lower than the share with 20 to 249 employees (53 percent). The share of businesses reporting that a majority of their full-time employees receive a mixed form of financial compensation (some combination of salary, hourly wage, and commission) is substantially lower for the smallest firms (24 percent) than it is for firms with ten or more employees (about 33 percent) which typically have more complex business structures.

Table 1:

Percentage of Full-Time Employees Paid by Salary, Hourly Wage, Commission, or Mixed Compensation

1-9 Employees 10-19 Employees 20-249 Employees All Firms
Salaried 34.7% 27.7% 13.6% 32.1%
Hourly 41.6% 38.6% 53.0% 42.3%
Commissioned —- —- —- —-
Mixed 23.7% 33.7% 33.3% 25.6%
Total 100.0% 100.0% 100.0% 100.0%
N 351 199 200 750

Part-time employees working at small businesses are generally paid in a different fashion than full-time employees. However, not all small businesses employ part-time workers. As businesses increase in size, they are more likely to employ part-time employees. Thirty-seven percent of firms with one to nine employees reported having no part-time employees compared to 24 percent of firms with ten to 19 employees and 23 percent of firms with 20 to 249 employees (Table 2).

Of those firms that do employ part-time employees, the percentage of firms that report a majority of their part-time employees are paid strictly by salary is less than nine percent for all employee-size-of-firm categories and decreases with firm size. The share of firms whose part-time employees are paid strictly on an hourly basis is substantial for all employee-size-of-firm categories and increases with firm size. Forty-two percent of firms with one to nine employees report that a majority of their employees are paid in this fashion, while 57 percent of firms with ten to 19 employees and 62 percent of firms with 20 to 240 employees report the same.

The share of firms that report a majority of part-time employees being paid strictly by commission is small and does not exceed three percent for any employee-size-of-firm category. And the share of firms that report a majority of part-time employees being paid a mixed form of compensation is about ten percent for all small businesses.

Table 2:

Percentage of Part-Time Employees Paid by Salary, Hourly Wage, Commission, or Mixed Compensation

1-9 Employees 10-19 Employees 20-249 Employees All Firms
Salaried 8.7% 8.4% 4.5% 8.3%
Hourly 42.4% 56.6% 62.1% 45.7%
Commissioned 2.2% 1.2% 0.0% 1.9%
Mixed 9.6% 9.6% 10.6% 9.7%
No part-time employees 37.1% 24.1% 22.7% 34.3%
Total 100.0% 100.0% 100.0% 100.0%
N 351 199 200 750


Overtime Pay, Bonuses, and Profit Sharing

Currently, the Department of Labor (DOL) rule regarding overtime increased the standard salary level (from $455* to $913* per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year). Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

As of January 2018:

The Department of Labor is undertaking rulemaking to revise the regulations located at 29 C.F.R. part     541, which govern the exemption of executive, administrative, and professional employees from the Fair Labor Standards Act’s minimum wage and overtime pay requirements. Until the Department issues its    final rule, it will enforce the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level. These regulations are available at: https://www.dol.gov/whd/overtime/regulations.pdf.

For the majority of small businesses, whether or not a particular employee should receive overtime pay is black and white. Thirty-eight percent of small businesses report that everyone at their firm who works more than 40 hours per week is eligible for overtime (Table 3 and Q#4). Thirty-five percent of small employers report that no employees work overtime, although the share of owners who report as such varies considerably by firm size: 39 percent of firms with one to nine employees report having no employees who work overtime compared to 21 percent of firms with ten to 19 employees and 16 percent of firms with 20 to 249 employees.

Table 3:

Method of Determining How a Specific Employee Who Works More than 40 Hours per Week Should Receive Overtime Pay

1-9 Employees 10-19 Employees 20-249 Employees All Firms
Follow common industry practice 8.4% 10.8% 22.4% 9.9%
Classify each job by occupation and earnings 3.9% 6.0% 3.0% 4.0%
Make only hourly-wage employees eligible 5.7% 14.5% 14.9% 7.5%
Make everyone but management eligible 2.0% 8.4% 4.5% 2.9%
No employees work overtime 38.8% 20.5% 16.4% 34.7%
Everyone who works overtime is eligible 38.3% 37.3% 38.8% 38.2%
DK/Refuse 3.0% 2.4% 0.0% 2.7%
Total 100.0% 100.0% 100.0% 100.0%
N 351 199 200 750

Among small employers who do pay certain employees overtime pay, a variety of policies are used to decide whether a particular employee who works more than 40 hours per week should receive overtime pay. Sixty-one percent of these firms deem anyone who works more than 40 hours per week as eligible for overtime pay, 16 percent follow common industry practice when making this determination (a practice more common among larger small businesses), 12 percent only make hourly-wage employees eligible for overtime pay, 6 percent make the judgment based upon the occupational and earnings classification of each job, and 5 percent make everyone but management eligible for overtime pay.

Virtually no small businesses have faced legal action or have been threatened by legal action because of the way they handle overtime eligibility and pay. Less than one percent of small businesses have been sued or seriously threatened with a lawsuit for allegedly not paying overtime or enough overtime.

A considerable share of small businesses pay their employees periodic bonuses or offer their employees a profit-sharing plan based on the performance of the overall business. Forty-four percent of small employers report that their full-time employees receive such benefits, with the benefit being more frequently offered at larger small businesses.

The benefit is most common among firms with ten to 19 employees, with 60 percent of such firms offering the benefit to their full-time employees. A majority (53 percent) of owners with 20 to 249 employees also report their full-time employees receiving the benefit. Firms with one to nine employees were least likely to offer the benefit to their employees, although a substantial share—some 40 percent—of these firms still offered bonuses or some form of profit-sharing.

Paid Time Off

Not all compensation is monetary in nature. Nonfinancial benefits also contribute to an employee’s total compensation and are another means to bid for and retain talent. An important non-pecuniary employee benefit is paid time off from work. Most employers offer these benefits to stay competitive in recruiting and retaining good employees.

An employer might offer employees paid time off benefits with contingencies attached, as manifested in paid sick leave benefits, paid vacation benefits, and paid holidays, for example, or the owner might elect to offer employees a paid time off benefit writ broadly and allow employees discretion in when and for what reason to use paid time off, whether it be for medical purposes, the caretaking of family members, leisure, or some other reason.

According to the Bureau of Labor Statistics, the majority of private sector workers already have access to such benefits. Sixty-one percent of private sector workers are reported to have access to paid sick leave, 76 percent are reported to have access to paid vacation time, and 77 percent are granted paid holidays by their employers.4F5 The percentages are even higher when just full-time employees are considered: 74 percent of full-time private sectors workers have access to paid sick leave, 91 percent have access to paid vacation time, and 90 percent are granted paid holidays.

The vast majority of small businesses already offer paid time off (PTO), time that can be used for any type of leave, to a majority of their full-time employees. We note that in the survey, PTO was addressed in a standalone question. However, respondents may have confused this specific and distinct benefit with other types of paid leave benefits they offer (such as paid sick leave or paid vacation), as many owners responded that they offer PTO in addition to other paid time off benefits that were addressed in the survey. Overall, 73 percent of small businesses report offering this benefit to majority of their full-time employees.

Seventy percent of firms with one to nine employees report offering the benefit, compared to 87 percent and 83 percent of firms with ten to 19 employees and firms with 20 to 249 employees respectively. A majority of firms (67 percent) offering paid time off grant employees two weeks or more of paid time off to their employees per year. For firms of all sizes, at least 80 percent of firms report that the number of paid time off days offered to employees annually depends on the employee’s length of service at the business.

In addition to the paid time off benefits offered by the vast majority of small businesses to their full-time employees, a majority of small businesses also offer paid sick leave to a majority of their full-time employees. About an equal percentage of small businesses offering paid sick leave report offering one week or more of paid sick leave per year to their full-time employees (41 percent), or alternatively, less than seven days of paid sick leave per year (42 percent). In contrast to more general paid time off, just 26 percent of small employers report that the number of paid sick days offered to employees depends on an employee’s tenure with the business.

For firms of all sizes, at least 88 percent of small businesses that offer paid sick leave allow sick days to be used for the caretaking of children and parents

A considerable share (at least 40 percent) of small businesses also offer some form of maternity leave to a majority of their full-time employees. Of those small businesses that report offering maternity leave, 45 percent offer paid leave and 55 percent offer unpaid leave. A plurality (38 percent) of those small businesses offering maternity leave give mothers with newborns between one and two months’ time off for maternity leave. Twenty-three percent of those offering a benefit are even more generous, offering three months of leave. Twenty-five percent of offering small businesses report that the amount of maternity leave granted depends on the employee. Only a small minority of offering small businesses (8 percent) provide less than one month of maternity leave.

Retirement Accounts, Employee Discounts, and Other Benefits

Saving for retirement is an important activity that should ideally occur over the entire duration of a worker’s career. Unfortunately, many workers in today’s economy are not adequately preparing themselves financially for retirement. According to the Federal Reserve Board’s 2013 Survey of Household Economics and Decision making, 31 percent of non-retired respondents reported having no retirement savings or pension, including 19 percent of those ages 55 to 64, individuals nearing or on the brink of retirement.

The Fed also reports that almost half of adults were not actively thinking about financial planning for retirement. Twenty-four percent of adults reported that they had given only a little thought to financial planning for their retirement, while 25 percent reported that they had done no planning at all. Finally, when asked how they and their spouse/partner (if they had one) planned to pay for expenses in retirement, 25 percent responded that they did not know.

The likelihood that a small business sponsors some form of retirement plan for its employees increases with firm size. Thirty-three percent of businesses with one to nine employees reported sponsoring a retirement plan of some sort for a majority of their full-time employees, compared to 57 percent and 63 percent of firms with ten to 19 employees and firms with 20 to 249 employees, respectively (Q#26). Overall, 38 percent of small employers report offering a retirement plan. This is a meaningfully higher percentage than the percent of small employers who, in prior research, reported sponsoring a pension plan a decade ago.

In addition to the benefits mentioned above, many small businesses offer a variety of other benefits to their employees. For example, 54 percent of small businesses give their employees store discounts or free goods and services from their businesses. The annual value to employees of these discounts or free goods and services can be considerable. Twenty-six percent of small businesses estimate the annual value of this benefit to one full-time employee is $1,000 or more, 12 percent estimate that the value ranges from $500 to $999, and 33 percent estimate that the value ranges from $100 to $499.

Finally, concerning some other miscellaneous employee benefits, 42 percent of small businesses offer disability insurance to their employees, 25 percent offer dental insurance, 28 percent of small businesses offer some form of job-related education reimbursement, 61 percent reimburse employees (to some extent) for work days missed due to jury duty, 48 percent sponsor a holiday party, 24 percent sponsor some type of summer event, and 71 percent offer flexible work hours.

Employee compensation can be financial (wages and salary, tips, commissions, etc.) or non-cash (e.g., employee benefits, retirement plans). Negotiations between employers and employees regarding compensation occur in the smallest to the largest sized businesses. The types of compensation packages differ due to a variety of factors including profitability, industry, size of business, and seasonality to name a few.

Edited for style and length by PPT

Source and complete report:

https://www.nfib.com/assets/NFIB-Employee-Compensation-and-Small-Business.pdf


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