When it comes to running a successful small business, there are few things as important as compensation. A solid compensation plan will not only help your business become more profitable, but it will also help with employee retention—while a bad compensation plan will send top talent running for the hills (and straight to your competitors).
But what, exactly, is compensation? What role does it play in building, growing, and running a successful business? And how can you develop a compensation plan that serves both your business and your employees?
What Is The Definition Of Compensation?
Compensation is defined as the payments you give to your employees in exchange for their contributions to your business—for example, their time, expertise, knowledge, or skills.
Compensation includes cash payment (like an employee’s base salary or overtime pay) as well as non-cash payments (like the employer contributions you make to an employee’s retirement plan).Â
Because small businesses need to hire a variety of employees in order to function, employee compensation is typically one of the largest expenses in running a business—which is why it’s so important to get it right.
Base Pay Versus Total Compensation
Often times, when employers think of compensation, they think of base pay—the hourly wages or salary that they pay their employees.
And while base compensation often makes up a large portion of an employee’s compensation package, generally, it’s not their total compensation—and it’s important to understand that difference.
As mentioned, compensation covers both cash and non-cash payments to employees; any way you compensate your employees would fall under the “compensation” umbrella. So, when you hire an employee, it’s important to consider their total compensation package and how that’s going to impact your bottom line—not just their base salary or wages.
What Are The Different Types Of Compensation?
So, how else might you need to compensate your employees outside of their base pay?
Some of the different types of compensation include:
- Base Pay. When you hire someone, you offer them a base salary or hourly wage—and that base pay generally makes up a good portion of their total compensation.
- Overtime Pay. If an employee is eligible to work overtime, any overtime pay they accrue would also be considered compensation.
- Commissions. Salespeople often work partially or fully on commission; when they make a sale, they get paid a percentage of that sale—and that payment would be considered compensation.
- Bonuses. If you have a bonus structure at your company (whether that’s an annual bonus, a bonus based on company performance, or an employee performance-based bonus or merit pay), that would also be considered part of an employee’s overall compensation.
- Employee Benefits. Employee benefits, including cash benefits (like meal allowances or gym stipends) and non-cash benefits (like retirement plants, health insurance, and vacation time) are part of employee compensation.
- Profit Sharing. If you offer profit sharing, any profit sharing distributions made to your employees would be considered compensation.
- Stock Options. Do you offer stock options to your employees? If so, consider that stock part of their compensation.
When you’re building your employee compensation budget (and determining whether you can afford to hire a new employee, and, if you can, how much you’re going to compensate your new hire), it’s important to look at the entire compensation picture—not just the salary or hourly wage you’re going to include in their offer.
Laws Around Compensation
In addition to keeping your budget and profitability in mind, there are also laws you need to consider when determining employee compensation.
Some of the legal issues you’ll want to keep in mind when setting employee compensation include:
- Minimum Wage. In the United States, the Fair Labor Standards Act (FLSA) sets a federal minimum wage for employees—and, as an employer, you need to comply with the standards and make sure your employee compensation is at least minimum wage. In addition to federal laws, different states and municipalities also have their own minimum wage requirements—so before setting your employee’s hourly wage or salary, make sure you’re in compliance with any applicable minimum wage laws.
- Overtime Pay. Under the FLSA, covered non-exempt employees are entitled to overtime pay (at a rate of at least 1.5 times their regular rate of pay) for any hours worked over 40 in a given workweek.
- Equal Pay. Employers are legally obligated to provide equal employment opportunities. That means you need to provide equal pay to employees—and can’t offer an employee less based on things like gender, race, religion, or disability.
- Workers’ Compensation. Most states require employers to carry workers’ compensation insurance for their employees, which will compensate the employee should they become ill or injured on the job.
How To Develop A Compensation Plan For Your Business
Not sure how to develop a compensation plan that works for your business and your employees? Here are some tips to help you get started.
- Offer competitive wages. It doesn’t matter what your personal compensation philosophy is—if you want to retain top talent, compensating them fairly and competitively needs to be a priority; otherwise, they’re likely to look for a better or more lucrative opportunity. Research compensation plans in your industry and make sure your plan is competitive.
- Reimburse your employees for out-of-pocket expenses. Your employees shouldn’t have to spend their own money in order to work for you. If an employee uses their own funds (for example, if they pay for a course you require as part of their training), make sure to offer reimbursement quickly.
- Be transparent about compensation. No one wants to work for a company that’s secretive about compensation. Be transparent about your compensation plan, including executive compensation, retirement plans, and advancement/salary increase opportunities. The more transparent you are, the more your employees will trust you—and the more likely they’ll be to stay with your company.
- Make sure human resources stays informed on compensation laws. As mentioned, there are laws surrounding compensation, and sometimes those laws change. Make sure your human resources team stays current on compensation laws—and adjusts your compensation plan accordingly. (For example, if your state raises its minimum wage, you may need to increase your team’s pay in order to be compliant with the new laws.)
Use Compensation To Build A Sustainable And Profitable Business
Understanding compensation is an integral part of running a successful and profitable business—and attracting top talent to that business. And now that you understand the ins and outs of employee compensation, you have everything you need to develop a compensation plan that works for you and your team.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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Hello Jane,
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My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
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Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
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At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
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Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
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I look forward to speaking with you soon.
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Cheers,
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John Doe
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Hi Jane,
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Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.Â
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After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
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I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
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Again, thank you for your time today. I look forward to working with you in the future.
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Cheers,
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John Doe
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Hi Jane,
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Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
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We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.Â
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Do you have any questions? We are here to help. Reach out whenever something comes to mind.
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Thank you again for choosing ABC Agency to insure Jane's Bakery.
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Cheers,
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John Doe
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Dear Jane,
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Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
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As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
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Do you want to discuss any of these policies?
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Cheers,
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John Doe
5. Introducing a New Product
A happy client may want to expand their business with you.
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Hello Jane,
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I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
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I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
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We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
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Would you like me to work up a quote for you?Â
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As always, thanks so much for being a part of the ABC family.
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Cheers,
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John Doe
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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Hi Jane,
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You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
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Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
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Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
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Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
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As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
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Thanks so much for your help!
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Cheers,
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John Doe
7. Policy RenewalÂ
If your client needs to renew their policy with you, send an email like this:
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Hi Jane,
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I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
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Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.Â
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If you're still happy with the coverage, we can easily renew it for you.Â
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Do you have some time to chat this week?
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Looking forward to serving you again!
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Cheers,
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John Doe