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Should You Increase Salaries or Benefits?

We all want to do better by our employees. Unfortunately, cash constraints usually mean that small business owners can’t be as generous as they would like.

So if you are faced with a choice of giving employees salary increases or better benefits, which is a better option to offer your hard-working employees?

What the Research Says

Woman in officeIn a country where work-life balance and parental leave are still hot-button issues, it’s no surprise that Americans prefer more and better benefits. Other countries have mandatory vacations, year-long maternal leave and access to affordable childcare. The U.S.? Not so much. That’s why these benefits can make a huge difference in the lives of your employees.

A survey from Glassdoor found that almost 80% of those surveyed said they preferred better benefits instead of a higher salary. Their top picks in a benefit package? Better healthcare options was the top winner, narrowly defeating more time off. Other top performers were more sick time and better retirement options.

Read on for ideas on how to increase benefits without increasing costs, and to learn when a salary increase trumps benefits.

Increasing Benefits, Not Costs

Some benefits, like lower healthcare premiums or a higher match rate for 401ks, will cost you money – but others can be done cheaply.

Adding more time off, including vacations, sick days and personal days doesn’t cost you any cash, though it could impact your business productivity.

And if you’re having a hard time deciding whether to give your workers more vacation time, consider this: Workers who take vacation time are generally more productive than those who don’t. It may seem contradictory, but employers also benefit financially from giving their employees time off.

Other popular low-cost benefits include free food, game rooms and exercise classes. Hiring a yoga instructor to come in once a week or hosting one company-sponsored lunch a month can offer a significant morale boost and foster stronger ties between workers and the company.

Depending on the circumstances, these benefits can have an additional benefit: more and better work from your employees. “My company served lunch every day; it was a great benefit and made me appreciate the company,” said one employee of a technology firm. “After a while, though, I realized it was also a great move by my company: our office was far away from most restaurants. Serving lunch in the office boosted community and increased communications, but it also meant we worked more – we were typically back at our desks after 30-45 minutes instead of an hour and a half if we had to leave the office for lunch.”

These ideas may seem hokey, but if you do them with the intent of making the workplace a more collaborative and beneficial atmosphere, employees will be able to tell.

Good benefits can also be the tipping point for a prospective employee deciding between your offer and a competing offer with a comparable salary. If you’re having trouble competing with companies that can afford higher salaries for their employees, offering a wider range of benefits can help you edge out the competition.

Not sure what benefits your team wants? Do a survey and ask people to tell you what they want more of. Maybe they want to bring in their dogs to work or allow their children to come in during spring break. You may not be able to implement all their ideas; after all, you’re not Google. But taking a few steps in the right direction can build trust and loyalty within the ranks.

The Case for Increasing Salaries

There are, however, times when salary matters more than benefits. If your main goal is finding new talent that other companies will also be scouting for, cash talks louder than anything else. No matter how good your benefits are, it’s easier to compare salaries than it is to size up two different sets of healthcare premiums or 401k options. In a 2015 survey from JobVite, almost two thirds of employees surveyed said they chose the higher-paying job when comparing different offers.

If you balk at offering more money, consider this: the best person for the job may not be willing to work for your wages. Investing in quality employees isn’t cheap, and your competitors may be willing to pony up where you aren’t.

This is especially important if you’re recruiting from the latest crop of youngsters entering the workforce. A survey from Robert Half about the work habits and preferences of Generation Z employees found generous pay was a top priority when looking for a job.

Offering regular salary increases can also help you keep more high-performing employees satisfied – and less likely to leave for greener pastures. While benefits may be the preferable way to keep employees, they won’t be able to hold employees if the salary gap between you and other employers is large enough. Sometimes the only way to show a current or prospective employee how much you appreciate them is through cold, hard cash.

Plus, it’s more cost effective to increase salaries by 2.5% every year than to bring in new employees who require training. That’s according to some reports, which say that employee turnover costs between six months and two years’ worth of salaries. Wouldn’t it be cheaper to increase the original employee’s salary by 3%?

If you don’t have an annual cost of living increase or can’t afford to offer one to every employee, at least try to acquiesce to any hard-working, valuable employee who asks for more money. Think about how much time and money it would cost to train their replacement – suddenly a raise is the frugal option.

One important consideration is that a raise must be given as a gift – not out of obligation or because you requested that an employee take on more responsibilities. A study from Harvard researchers found that raises only spurred morale when the increase came out of the blue and not because the company had to do it.

In Conclusion

If you are recruiting new employees, there may not be a substitute for a competitive salary. But if you are worried you might lose some key employees, but don’t have the cash flow to increase salaries, consider upgrading benefits. It could be the win-win you are looking for.