Stop Overpaying New Hires After June's Job Rebound

Key Takeaways

• Small business job openings rebounded in June according to NFIB data, signaling tighter competition for quality labor throughout the rest of the year.
• Benchmark your current payroll against the Bureau of Labor Statistics (BLS) Occupational Employment and Wage Statistics to ensure your retention rates stay high.
• Re-evaluating non-cash benefits now can prevent a wage war that eats your 2024 profit margins.
• Audit your current staff's total compensation before listing new openings to avoid 'wage compression' where new hires make more than veterans.

The NFIB Small Business Optimism Index just hit a high for the year, driven largely by a surge in owners planning to create new positions. According to reporting from Small Biz Trends, 37% of small business owners reported job openings they couldn't fill in June, a significant jump that shows the labor market is heating back up for the neighborhood business.

Conventional wisdom says that when hiring picks up, you should just post an ad and see who bites. Here's why that's wrong for most small owners: walking into this hiring rebound without checking your current math is a fast way to lose your best people. If you offer a new hire $22 an hour because that's the current market rate, but your 3-year veteran is still at $19, you're essentially paying for your own turnover. The Bureau of Labor Statistics recently reported that total compensation costs for civilian workers increased 4.1% for the 12-month period ending in March 2024 (source: bls.gov). If you haven't moved your numbers, your competitors will do it for you.

Will your veteran staff leave for a $2 raise?

When the local labor market tightens, the 'loyalty tax' becomes a real liability. Say you run a 10-person HVAC company in Ohio. You need a new dispatcher and realize the going rate has climbed from $18 to $21 since you last hired. If you bring in a stranger at $21 and keep your existing team at $18, word will get out. Replacing a skilled employee usually costs about six to nine months of their salary in recruiting and training costs. Paying the $3 bump to your existing team is almost always cheaper than the $15,000 to $20,000 hit of replacing them.

Check the Department of Labor's Wage and Hour Division resources to ensure your classifications are correct before you adjust pay. Misclassifying an employee as exempt just to avoid overtime during a busy hiring season is a mistake that leads to back-pay orders and fines. The goal is to stay competitive without breaking the law or your bank account.

Can you compete on something other than hourly rates?

If you cannot afford a flat 5% raise across the board, you have to look at the 'hidden' costs of employment. Most solo or small-team owners forget that flexibility is a currency. A retail business that offers a consistent, predictable schedule two weeks in advance often beats a big-box competitor that pays $1 more but uses 'on-call' scheduling. You should also look at Section 127 Educational Assistance programs. Small businesses can provide up to $5,250 per year in tax-free educational assistance to an employee, which can be used for tuition or even student loan repayments (check irs.gov for current limits). This is a massive retention tool that costs you less than a taxable wage hike.

How do you fix your payroll before July ends?

Don't wait until a key employee walks into your office with a resignation letter. Once they have another offer, you've already lost.

1. Pull your Last-12-Months (LTM) payroll report and identify anyone who hasn't had a cost-of-living adjustment in over 14 months.
2. Search the BLS 'OES' data for your specific metro area and job titles to see the 25th, 50th, and 75th percentile wages.
3. Calculate the 'Replacement Cost' for your top three earners, include job board fees, training hours, and lost productivity.
4. Meet with your bookkeeper or CPA to determine if a 3% 'Retention Bonus' or a shift to a 4-day workweek is more sustainable than a permanent base-pay hike.
5. Update your job descriptions to emphasize 'Total Rewards' like health stipends or flexible PTO, rather than just the hourly rate.

Fixing your wage gaps takes about four hours of spreadsheet work but can save you tens of thousands in mid-year turnover costs.

Related free tool

Bad Hire Cost Calculator — See what one bad hire is actually costing you. Free, no signup to start.

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📋 Disclaimer

This article is for informational purposes only and does not constitute legal, tax, financial, or professional advice. Laws and regulations change frequently, and the information presented may not reflect the most current legal developments. Always consult with a qualified professional (CPA, attorney, financial advisor) before making business decisions based on this content. MyBizNerd may receive compensation through affiliate links, but this never influences our recommendations.

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