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Compensation: Why Average Salaries Lag at Small Companies

Compensation: Why Average Salaries Lag at Small Companies

By Jen Hubley Luckwaldt, PayScale.com

The economic downturn took at big swing at employee wages at companies of all sizes, yet some sectors show signs of bouncing back.

Large companies are leading the charge to higher wages as medium-sized companies trail closely behind. But small company wages, unfortunately, still languish. Why is that and what do employers need to know right now about their labor market to remain competitive?

Shifting Average Salaries
The PayScale Index, the online salary database from PayScale.com, measures the quarterly cash compensation for full-time employees at private companies in the US. The index showed .6 percent growth in compensation for small companies (<500 employees) in Q3 2011.  While this was an improvement over a painful second quarter – small company salaries still lagged behind medium (500-1,500 employees) and large companies (1,500+ employees), which seem to be tracking out of the recession more rapidly.

"In the last two years, it's a very different salary story, large versus small company," says Al Lee, PayScale's director of quantitative analysis. "In some sense, salaries at small companies didn't drop as much in the recession of 2008 – 2009, when pay went down [for all companies.] But that's because it hadn't gone up in 2007 – 2008."

Salary growth at companies with fewer than 100 employees were underwater for all of 2009, the last quarter of 2010 and through the third quarter of 2011;  a brief rebound at the end of 2009 brought small company wages up to national levels. Overall, small company compensation has stayed about 1 percent behind national average wage growth trends.

When it comes to wages, companies with over 1,500 employees continue to enjoy the healthiest recession recovery, with salaries increasing (albeit by amounts as small as .4 and .6 percent per quarter) at large companies throughout 2010. Salaries at medium-sized companies fared slightly lower, but still experienced some growth — .1 percent to .4 percent in the last three quarters of 2010, and .7 percent for Q3 2011.

Understanding why salaries have lagged at small companies requires a look back at the past 5 years.  

An Earlier Start to the Recession
If you ask economists, Lee explains, the recession started in Q4 of 2007 when growth was negative; many larger companies didn't feel the economic pinch for at least a year.

It was a different story for small businesses in recession-sensitive sectors like construction and real estate. For them, the economy turned in late 2007, when new housing construction slowed. Today, unemployment rates remain as high as 15 percent in the construction industry.

Other sectors such as retail, food service and accommodation and small service industries (e.g. small accounting firms) also felt the pinch.

What do these businesses have in common? "[They're] a bit low-margin businesses," Lee says. "They're not hugely profitable businesses to start with."

Focusing on Overseas
Large company profitability has returned, somewhat, says Lee, partly because of their global footprint.
"Clearly a lot of large companies have become very profitable again," says Lee. "Even some companies that were struggling, like the automotive industry, are coming back and making a profit. Some large companies are very profitable, which means that they have more flexibility on wages."

Large companies with international sales staffs have the ability to retrench in growing global markets. If the US market is stagnating at zero growth, they can shift their focus to growing markets, such as China. This flexibility translates to profits, which translates to more money for salaries.

Small Business Competes for Top Talent
The good news, according to Lee, is that if you're a small company that's survived the down times, you're doing something right. "Businesses that were poorly-run and weren't maximizing their profits and figuring out how to do things sensibly are out of business", says Lee.

For small business recruitment, the most important thing is to stay competitive to attract top talent as the market picks up, adds Lee. “You need to be ready for a lot of eventualities and it's not always going to be a rosy scenario every day."