A small business guide to remuneration structures
At a glance
- Select a remuneration structure that suits your business by reflecting on your business’s positioning in the industry.
- Key to choosing the right strategy is understanding the impact of your chosen structure on your cash flow.
- Small business owner Sam Roby shares three tips for getting remuneration right.
One of the biggest pressures on a small business’s cash flow can be remuneration – paying employees.
This makes choosing the right remuneration structure particularly important to ensure your cash flow stays on track – and that you retain the ability to adapt to change and capitalise on growth opportunities.
But which structure might suit your business best? A small business financial expert shares his tips for choosing the right remuneration strategy.
Importance of fair and objective remuneration
According to the Australian HR Institute (AHRI), businesses small and large need to ensure their remuneration strategy is fair and objective, and that decisions around employee pay match up to organisational strategy and values.
That means considering the nature of the industry in which your business operates and designing a remuneration structure that reflects that.
AHRI offers the following guide to possible remuneration strategies for different types of organisations:
|Type of organisation||Possible remuneration strategy|
|Not for profit||Lower fixed pay, emphasis on fringe benefits tax-free benefits|
|Start Up Public Company||Low fixed pay and large allocation of options|
|Competitive Sales Market||Low fixed pay and high incentive earnings|
|Mature Market||High fixed pay and low incentive payments|
For start-ups or non-profits, for instance, it might be worth offering employees a fixed rate of pay with the possibility of additional benefits or extras on top that are awarded based on performance or productivity.
This contrasts with the higher fixed rate of pay that some businesses might provide with fewer additional benefits. And that’s just for salary or wage-based arrangements: workers can be paid part-time as well as full-time, or according to a contract or award.
Whichever route you choose, AHRI says the decision should be transparent, and the nature of that decision made clear to employees.
Keen to get to grips with cash flow management? Download Prospa’s cash flow forecast template to stay on top of your incomings and outgoings, and find out where your finances might need a boost.
How one small business approaches pay
Small business owner Sam Roby is co-founder of Pure Capital, a Sydney-based broker specialising in car and equipment loans. When they founded the company, he and his fellow directors would each earn a commission on transactions made by the business.
Sam says this structure can benefit the business from a cash flow perspective, because “if the business doesn’t make money, we don’t get paid” – meaning that the company doesn’t need to fork out more money than is being recouped by income.
When Sam’s business expanded though, he and his fellow directors needed to consider the cash flow impacts of other remuneration structures.
“For the first two years, we didn’t have a salaried employee,” he says. “After we got up and running, our first salaried employee kept a straight salary with the occasional bonus based on productivity performance.”
Since that first employee, Pure Capital has recruited a team of brokers, with commissions based on revenue in addition to a fixed salary.
Which structure might suit your business?
Sam says many small businesses in service-based industries, such as hospitality or the trades, might prefer to hire employees on contracts because of the low impact on cash flow.
From a business perspective, contract workers don’t carry a wage bill – the fixed, ongoing expenses such as payroll tax that come with salaried and waged workers – thereby making a smaller impact on cash flow.
It’s well worth returning to the consideration of ‘fair and objective remuneration’ though, before trying to hire only contract or ‘gig economy’ workers – security and predictability of employment can be a big part of a worker’s decision to accept or reject a role.
And salary- or wage-based structures might also benefit the employer, particularly in industries where work is measured in more qualitative ways, says Sam.
But he also warns of the knock-on effects to cash flow, because a business will be paying wages “regardless of the performance of the business”, which can strain cash flow for a newer small business looking to get off the ground.
“You’ve got to be super clear on your numbers, work out how much of your turnover will go to the wage bill, and make sure you don’t exceed that until you need to,” he says.
How to get remuneration right
Here are Sam’s top three pointers for managing remuneration of your employees:
- Know the industry standard: “It’s important to know your market when you try to attract people. If everybody in your industry is on wages, for example, there may be a reason why.”
- Communicate with your employees: “Understand what they want, what role they might have moved from, and whether it’s more suitable to offer them a choice of remuneration or to create a clear framework as to how they earn.”
- Understand the cash flow impact: “Make sure your business has enough work to do and you have a clear reason for hiring. Understand how much hiring an employee is going to cost you versus what they can generate for the business. Make sure you hire them to actually fulfil a need.”
At its core, remuneration is about fostering a mutually beneficial relationship with your workers, whether you have three or 30.
“Your employees are most important,” says Sam. “If you’re not on the same page as them, that’s a disaster waiting to happen. But if they feel empowered, they’ll have your back.”
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