The Challenge of Pay-fixing in SMEs

One of the many challenges faced by owners and managers in SMEs is accurately setting pay levels for employees without compromising the financial health of the business. For some managers it may be tempting to rely on local knowledge, and set remuneration based largely on personal knowledge and anecdotal evidence. But there are risks in this.

Conventional wisdom around HR circles has long been that remuneration levels in NZ are closely correlated with the scale of operation of the organisation in which a role is based. Or to put it another way, a specific role in a small organisation (e.g. an SME) is likely to pay less than a directly comparable role in a large organisation.

The question however is whether or not such a practice does hold for SMEs, and if it does, should it apply in all cases?

In order to generate productive discussion I have completed some high level testing of the theory against current market data, to establish whether or not SMEs actually pay less than larger organisations do for similar roles. Fortunately our September 2015 pay survey provides data which allows such a review.

Looking at Top Executives

At Top Executive level (that is, Chief Executives and their direct reports at the “second tier”) our results would seem to confirm the theory: Median Total Remuneration (inclusive of all benefits) for employees in the SME group is just 86.5 percent of the Median Total Remuneration for similar roles nationally (i.e. all contributing organisations, of all sizes). The Median level represents the middle of the range for the sample, where exactly half the records in the sample are paid more and half are paid less.

Median pay for Top Executives in SMEs does appear to be lower

Median pay for Top Executives in SMEs does appear to be below national rates

This is clearly illustrated in the accompanying chart, which shows that pay levels in the SME group are skewed slightly to the left: in virtually all bands where remuneration is below $200 000, the proportion of SME employees is higher than is the case for the national group. The Median for SMEs falls into the band from $180K – $200K. (Click on the chart to expand).

Above this point the reverse is the case: the proportion of national staff in each group is generally higher than the proportion of SME staff. The more “right tending” national distribution, including the higher proportions at the top end, result in a substantially higher Median, in the $220K – $240K range. A significant factor in this is the high payments at Chief Executive level, where there is little doubt that scale of operation is a factor.

It is also important to note that for both groups the lower paid roles (i.e. those below the Median) are likely to be those at the second tier, with the Chief Executive roles primarily in the top half (or even top quarter) of the respective distribution curves – with CEOs of the very large organisations at the extreme right of the national curve. As a result many Chief Executive level roles in SMEs are likely to be grouped alongside “second tier” roles in the national sample.

Based on this high level analysis it is safe to assume that for many Top Executive roles the accepted wisdom holds: a position in a small organisation (SME) is likely to be paid at a lower level than a similar role in a larger organisation.

Spot checking rates for individual roles also confirms this, although there are exceptions. Accordingly, it would be prudent to check the individual role against reliable market data when making an appointment.

General Staff

Somewhat counter-intuitively, at General Staff level (i.e. all roles below Top Executives) the structure of many SMEs is a significant factor in reversing the pattern. At this level few SMEs are large enough to employ many people in “junior” or “trainee” roles; the need is more often for experienced staff, with the ability to get the job done with a minimum of direct supervision.

Median General Staff pay in SMEs appears to be higher than the general market

Median General Staff pay in SMEs appears to be higher than the general market

As a result SMEs typically employ relatively few people at the lower reaches of the national pay ranges, and therefore proportionately more at the higher levels. In contrast to the Top Executive chart above, the “pay curve” for SME staff is skewed to the right, above $70K; the Median Total Remuneration for SMEs is surprisingly 24.3 percent higher than the Median for General Staff nationally.

The key contributors to this are:

  • Relative to organisation size SMEs employ fewer people at entry level and as trainees than larger organisations
  • A lower Manager to Employee ratio in SMEs is also likely to contribute to proportionately higher numbers of managers in SMEs (relative to organisation scale of operation) than is the case in larger national organisations.
  • For many common support roles (think Receptionist, Accounts Officer, Administration Officer) scale of operation plays little part, as rates are largely consistent nationally
    • This is not surprising as for such roles all organisations are potentially competing for staff in the same local pool
  • Our data shows that in many SMEs the Chief Executive may be the sole employee at “Top Executive” level; the other “senior” roles are held by operational management staff, with additional “senior management” responsibilities.
    • The top end of the SME pay curve reflects this, with many operational managers also being part of the Senior Management group.

And the conclusion?

Accepting that the analysis here is at a relatively high level, primarily for the purposes of prompting discussion, it does show that at Top Executive level there is some substance in the conventional wisdom that remuneration correlates closely to scale of operation: employees in small organisations are typically paid at a lower level than employees in similar roles in larger organisations. This is also confirmed at individual position level, however it does pay to check as there are exceptions.

The situation is less clear-cut for roles below Top Executive level. Roles within SMEs are more likely to be mixed, covering a wider range of responsibilities than apparently similar roles in larger organisations, and there is less opportunity to employ trainees and entry level staff. For other roles SMEs compete directly with other employers of all sizes for local resources, and need to offer competitive pay levels in order to attract staff.

Given that these factors are likely to lead to wide variation, reliance on anecdotal evidence or perceived “local market practice” may not be the most reliable way to set pay levels. Checking your instincts against reliable survey data may be a prudent step.

What is your experience? Are pay rates in SMEs typically lower than those for equivalent roles in larger organisations?

Or, as outlined above, is it more complex than that?

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