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As a small business owner, keeping your staff happy is key. The important and often difficult part is knowing what to prioritize. Too often we want to ensure that employees feel incentivized to keep-up performance and their job satisfaction. But setting expectations according to what you can offer, year after year, can be tricky. If you are faced with a choice of giving employees salary increases or better benefits, what is ultimately the best option to offer those hard-working employees?

Let us walk you through what the research says to get you to the right conclusion.  

1. Depends on location


Benefits can vary dramatically based on the country you live in. So to begin with, you want to become uber familiar with rules, employee rights and the benefits offered by mandated government laws wherever it is that you run your business. For instance, benefits like parental leave and health care are significantly important in the US where this is usually offered by the employer. By contrast, for countries in Europe, there are mandatory vacations, maternity leave, government health care, national instituted retirement policies, sick leave and access to affordable childcare, all directed by the government. Benefits can thus make a huge difference in the lives of your employees, and depending on where you live, can make a huge difference for you as an employer. It is worth noting that within the EU, the government mandates ranked as the most generous are in Denmark, France, and Spain, while the U.K., Switzerland, and Ireland were among the least generous. Have a look at your particular location, to educate yourself fully on what you are required by law to provide as an employer and then consider them through the context of your employees. These two graphs outline many entitlements within Europe to show how they vary. 

2. The data on employment costs

Next, you want to consider the actual employment costs which according to the data varies greatly within Europe. Employers in Italy – the European country with the highest employment costs – have to pay an extra USD 15,544 in social security costs on top of a salary of USD 30,000 (55% of gross salary). In Denmark, employers have to pay an extra USD 1,632 – just 5.4% of the gross salary. Meanwhile, countries like the UK, Germany, Ireland, or Denmark have an advantage in that their employment costs are far lower than those elsewhere. 

A recent KPMG study compared employers’ costs and employees’ net income in various European countries, and further highlighted this disparity within Europe.  For instance, it found Denmark has a low cap on social security contributions, making Denmark stand out in the comparison of social security. France has high social security rates and no cap. This explains why, for the employer, in both scenarios, Denmark has the lowest cost and France the highest cost. The standard in most EU countries is that social security taxes and income taxes are levied separately. Income tax is typically calculated through progressive income tax rates. Meanwhile, social security tax rates are generally fixed and in various countries only calculated up to a certain income. Income tax is typically owed by the employee, whereas social security tax is most often a cost to both the employee and employer. So where does that leave you as an employer? Let’s take a closer look at the two arguments: increasing benefits vs. salary.

3. Considering the two arguments, increase in benefits vs salary? 

Once you have done the appropriate legwork and looked at employer policies and employment costs in your country, let’s consider the two options as they relate to your business: 

  • The case for Increasing benefits: Increasing benefits can often be your easiest route and you can increase benefits in a variety of ways. When it comes to vacation time, know that European workers get more time off, including vacations, sick days and personal days than elsewhere in the world. This is proven to have a direct and positive impact on business productivity. Workers who take vacation time are generally more productive than those who don’t. If you want to consider how you as a business can offer a low-cost benefit, what about offering free food, game rooms, and exercise classes? There is a reason that Google and Apple offer these perks in every single one of their offices. Indeed, they are proven to significantly boost morale and foster stronger ties between workers and the company. Finally, perhaps the offer of a shorter work day could be what makes you more attractive than the competitions. There is in fact a great deal of research indicating that less working days makes people more productive. Indeed, sometimes outcomes (instead of hours) force us to work smarter rather than harder. 

 

  • The Case for Increasing Salaries: There are of course times when salary matters more than benefits. If your aim is to find new talent and beat out the competition, nothing stands out more than a higher salary. Everyone recognizes a higher number. No matter how snazzy your candy bar or good your free coffee is, the most automatic way to compare offers is to compare salaries. Moreover, there is an argument for spending the most on raw talent since bad to average performing employees can end up costing you more. In addition, offering regular salary increases can also help you keep more high-performing employees satisfied and less likely to leave. 

Ultimately, this comes down to what you think is best as an employer and depends on what country you live in. But, as your ruminate on what is most applicable to your business, bear in mind a couple of key points. Take a look at your training costs, particularly if you run the risk of people leaving because your salary is below average. Sometimes, training new employees is expensive, not to mention the time lost doing so. Think about your business and what this would cost you. Does paying an existing above average (and trained) employee at a higher rate help mitigate the potential cost of having to train a new one? Also, if you are hiring millennials know that Generation Z  (the youngest crop of job searchers) considers generous pay as a top priority when looking for a job, even though these expectations are unrealistic and not commensurate with their experience or the average European wages. Are you hiring from this current crop of graduates or not? Finally, think about offering the promise of salary raises (instead of just setting high salaries to begin with). Research proves that incentivized pay, based on the quantity of work delivered rather than on the time spent on the job, is particularly beneficial for increasing worker productivity. 

4. Be case specific


There is no magic formula or conclusion that fits all businesses. Rather, deciding on the increasing salaries vs benefits is case specific. The data reflects this reality and we hope that the above information has helped you to consider how you business fits in to come to the best decision. As we mentioned, get to know your labor laws and look at your business through the lens of an employee. What might matter most? As a final step, there is a lot of merit to consulting with a human resource specialist in your area to get the best idea of the going-rate in your industry for competitive pay packages and benefits needed to keep employees satisfied. 

Bare in mind that obviously, employees expect a salary that meets industry standards. Similarly, benefits work well at keeping employees happy, particularly if you don’t have the cash flow for upping salaries. But, if you are still stumped on what matters most, know that a manager setting employee pay and benefits based on country, business and current situation should ultimately, always consider the future. So, as a final consideration, think about what will matter most today and down the line.

Jessica Brown
Jessica is a globally renowned writer specializing in International Relations, Economics and Political Affairs. A graduate from Brown and Cambridge Universities she now focuses on helping small to medium businesses grow their bottom line.
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