How much is a great employee worth to you? Likewise, how much is a bad employee costing your business?

Compensation can be one of the trickiest parts of running a business. That’s because pay is so subjective; sure, there are industry guidelines and things like minimum wage requirements for entry-level positions, but ultimately it’s up to us to determine what we pay our staff. And while we like the control that comes with owning a business, this is a tough one.

Compensation can be especially tricky for business owners because:

• It’s our money and it’s hard to part with our money for any reason, especially when it involves giving it to a bunch of people who may or may not work hard for us.
• Since we own the business, we think we’re the top talent. Maybe we fear that we’ll hire someone who knows more than we do.
• Quite simply, we’re swamped. We don’t have time to research salaries or to invest in a thorough hiring process. We get who we get.

So when you consider all the “issues” we business owners are dealing with, it’s no wonder compensation can get to be so frustrating, and why so often it goes terribly wrong. Here is a list of the four most common compensation mistakes we see business owners make:

1. They don‘t recognize the value of a small-business environment.

Small-business owners sometimes offer too high a salary in order to compete for the best talent.  But what they don’t realize is that not everyone wants to work in Corporate America. In fact, there are a lot of people who prefer to work for a smaller business.  Some people really appreciate that they can see the difference they make, for others it�s more flexibility or getting to work on a wider range of issues. But instead of “selling” these benefits they feel like they have to match that big company salary. We want our team members to be experiencing some of the risk that we are taking, and lightening up on the salary is one way to do that. We recommend researching salaries on such Web sites as careerbuilder.com, and setting your salary in the middle of the range being advertised. This will ensure that your company is competitive in what it pays; yet it’s not overpaying.

2. They don’t pay bonuses.

If you keep your salaries down around the midpoint for the position, then how do you attract above-average talent? Offer generous bonuses (20 percent to 50 percent of base salary) and tie them to specific objectives as well as company performance. By offering these generous bonuses you are able to close the gap between your middle-of-the market salary and the top-quartile talent you want to attract. By creating specific, measurable objectives that trigger the payment of these bonuses, you are only paying top dollar if your talent is high performing. Establish these objectives and measures at the beginning of the year so that team members know exactly what they will be getting. You can even review it with them quarterly to make sure there are no surprises.

3. They allow themselves too much discretion.

As much as possible we want to raises and bonuses to be formula-driven. Even the best employee can end up overpaid if they get 5 percent raises (maybe 10 percent in good years). Pretty soon your paying your receptionist more than a starting engineer! If we don’t have a formula for figuring out what our raises are going to be and instead use “judgment” we end up paying too much and/or we create inequities. Also, discretion can be discriminatory because, of course, we will give more of a bonus to the people we “like.” Having a formula for bonuses is even more important. We want our team to know that the bonus is rewarding their results and achievements. If we just hand out discretionary bonuses, our employees feel lucky but not rewarded.

4. They do not have a compensation system tied into their overall company strategy and values.

Compensation says a lot about our values. If our practice isn’t aligned with our overall strategy and stated values, we are missing a powerful opportunity to reinforce our culture. You may have a business that uses a lot of lower cost labor; in that case, keeping compensation low and living with higher turnover may make all the sense in the world. Or you may have a business where expertise and client relationships are the key to success, so keeping people around is most important. What we’ve given you here are general rules, which will work for most companies. But each company has to adapt this to their own situation, strategy and values.

Your company’s compensation is probably one of the highest line items in your budget. Are you getting value for what you’re spending? It would be well worth your time to investigate the answer to that question.