It can be tough for entrepreneurs to attract and retain high-quality employees in the early stages. If they hope to hire a stellar workforce, they need to sweeten the proverbial pot with employee benefits. But that comes at a cost.
Providing access to the employee benefits applicants seek may mean investing a significant percentage of funds on top of an employee’s salary. According to the U.S. Bureau of Labor Statistics (BLS), in December 2020, approximately 70% of private employee compensation was for wages. The other roughly 30% was spent on benefits.
Entrepreneurs typically struggle to manage startup costs and anything more than the basic requirements of employee compensation. All hope is not lost, though. In this instance, crossing a few key thresholds before offering the three benefits below can be a make-or-break proposition for your new business venture.
1. Retirement plans
A retirement plan might be the one benefit you don’t think you need to provide employees right away. With so many U.S. workers struggling to save for their post-work years, though, this perk can set your company apart from the pack.
Many options for retirement plans are going to be too pricey for entrepreneurs because defined benefit plans typically require the employer to bear nearly all the financial burden. More often than not, that cost will put such plans out of reach, but there are more affordable options.
For example, any entrepreneur can offer a small business 401(k). These types of plans offer 401(k) products without the massive fees larger businesses typically shell out for plan administration. There are also significant tax advantages for companies that invest in their employee’s retirement plans.
Make sure you incorporate all the relevant variables into your calculation of the added cost of employee compensation.
When should you offer retirement plans?
Should you cross the business profitability threshold before you offer a 401(k)? Not necessarily. There are plans where employer contributions are not required. Once your new venture does return a profit, you might consider matching employee contributions.
Alternatively, you could offer a 401(k) profit-sharing plan that rewards employees for helping get you into the black. Such plans might be a secret weapon for employee longevity. The more good employees invest in your business success, the more you invest in them.
You can also set an employee duration threshold for offering retirement plans. Few employers offer immediate participation. Some wait until the employee has worked for the company for six months or one year.
Without a doubt, offering a retirement plan as part of your employee compensation package will put you ahead of companies that don’t. Delaying offering this benefit might hold you back from recruiting the best employees. With affordable options for small and new businesses, however, there’s no need to wait.
2. Health insurance
Health insurance is an expensive benefit that many entrepreneurs may assume is out of reach, yet it’s vitally important to employees. In fact, 56% of employees say healthcare coverage is what keeps them in their current position. The same survey found that 46% say it was a positive aspect — or the deciding factor — when they took their job.
While not required to offer healthcare until you reach 50 employees, many entrepreneurs with fewer employees want to provide the benefit to attract employees. Fortunately, there are options.
The federally-facilitated Health Insurance Marketplace promotes its Small Business Health Options Program (SHOP) plans for businesses with 1 to 50 employees. However, SHOP plans are not available in all states. Some states with their own health insurance exchange offer small business plans for companies with up to 100 employees. Furthermore, many local municipalities and chambers of commerce have started offering group plans to small employers.
When should you offer health insurance?
Business owners always have the option of buying into private group plans if they have at least two employees. The cost to the employer for these benefits will vary widely. Businesses can pay the full cost of each employee’s premium or facilitate access to a group plan. Group plans are nearly always less expensive for employees than individual plans.
Keep in mind that there is a legal threshold for enrollment if your business offers health insurance to employees. The IRS mandates a maximum 90-day waiting period for you to provide it to new hires.
Pay attention to your current employee requests and what your job applicants are saying as they interview. You may find that health insurance is a component of your employee compensation package that you can’t afford to do without.
3. Paid leave
Let’s face it. Even unpaid leave is difficult. When an employee takes a vacation or catches the flu, who will be there to cover for them? Nonetheless, every entrepreneur comprehends the value of paid leave as an employee benefit. Hard-working employees should be able to take some time off without sacrificing their income.
Under federal law, paid vacation, holidays, sick, and personal leave are not requirements for any employer. There are, however, legal requirements for paid leave in certain states and municipalities. Entrepreneurs should be aware of any laws that apply to them.
Businesses that do offer paid leave handle it differently. Some define a certain number of days for each type of leave (e.g., vacation vs. sick leave). Others take a consolidated paid time off (PTO) approach, allocating a certain number of days to be used as the employee sees fit. For example, 15 days a year could be used for 10 days of vacation and five days of sick leave.
When should you offer paid leave?
As with health insurance, your business plan might include a threshold of profitability before you’re able to offer a generous leave benefit. Paying an absent employee while also paying a temp to take their place isn’t inexpensive. Your business might need to start with a few paid vacation days and build up as you can afford it.
Another key threshold with paid leave is employee longevity. Many companies don’t offer any — or as much — paid leave during the first year. As employees stay with the business, they may accrue larger chunks of time.
Your business is in the driver’s seat with regard to nearly all its leave policies. However, remember that paid time off represents an attractive part of employee compensation. Happy, rested, and healthy employees are productive employees.
Start small and build as you grow
The number of employees you have will affect how generous you can be with paid compensation. It also affects how flexible you can be with benefits.
Start with what your budget can bear and increase benefits from there. As your workforce grows, some economies of scale may come into play.
Invest in your employees, and they are far more likely to invest in your business and its success. Consider the number of employees, their longevity, and your profit margins. Keeping all of these factors in sharp focus may just help your small business cross the benefits threshold.