Pay Equity for Small Businesses: Practical Guide

Introduction

Small businesses face unique pay equity challenges: limited resources, informal processes, close relationships with employees, and often working below regulatory thresholds. However, building equitable compensation practices from the start prevents costly problems as you grow and creates competitive advantages in talent markets.

This guide provides practical, resource-appropriate approaches for small businesses (under 100 employees) to ensure fair pay.

Why Small Businesses Should Care

You May Be Required Soon

Expanding Regulations:

• EU Directive covers 100+ (phasing to 50+)
• Many US states/cities have no size threshold for pay transparency
• Iceland requires certification for 25+ employees
• Trend is toward lower thresholds

Better to be Ready: Building practices now is easier than scrambling when mandates arrive.

Talent Competition

Candidate Expectations:

• 67% of job seekers expect salary ranges in postings
• Younger workers demand transparency
• Competitors offering transparency have advantage

Retention:

• Pay equity issues drive turnover
• Replacing an employee costs 50-200% of salary
• Can't afford to lose talent over preventable problems

Preventing Growth Pains

Early-Stage Informal Practices Create Problems:

• Founder's friend got discount equity
• First engineer got below-market salary "as favor"
• Sales rep negotiated 20% above market
• These inconsistencies compound as you scale

Foundation for Scaling:

• Clean compensation structure enables hiring
• Facilitates fundraising and due diligence
• Prepares for professional HR infrastructure

Legal Risk

Not Exempt from Discrimination Laws:

• Equal pay laws apply regardless of size
• Even one employee can file complaint
• Small businesses often lack legal resources for defense
• Settlements can be devastating

Assessing Your Current State

Quick Diagnostic

Answer These Questions:

1. Can you explain why any two employees are paid differently?

   • If no: You have equity risk

2. Do employees in similar roles know they're paid fairly?

   • If no: You have trust/transparency gaps

3. Have you hired someone in last year based on their prior salary?

   • If yes: You may have carried forward discrimination

4. Do you have salary ranges for positions?

   • If no: You lack structure for consistency

5. Could you defend your pay decisions if questioned?

   • If no: You lack documentation

6. Do managers have unlimited discretion in offers/raises?

   • If yes: You have bias risk

Scoring:

• 5-6 "good" answers: Strong foundation, optimize
• 3-4: Moderate risk, needs attention
• 0-2: High risk, immediate action needed

Data Collection

Gather This Information (spreadsheet is fine):

• Employee name
• Job title/role
• Current salary
• Hire date
• Years of experience (total and in role)
• Education level
• Performance rating (if formal) or manager assessment
• Gender and race/ethnicity (if known and legally collectible)

Analyze for Obvious Issues:

• Are people in same roles paid similarly?
• Are women paid less than men in comparable positions?
• Are there big unexplained differences?
• Do salary decisions have clear rationale?

Example Red Flag:

Software Developers:
- Mike: $95K, 3 yrs experience, bachelor's
- Sarah: $78K, 4 yrs experience, bachelor's
- James: $92K, 2 yrs experience, bachelor's

Red Flag: Sarah has most experience but lowest pay. Need to investigate and potentially remediate.

Building Compensation Structure (Low-Cost Approaches)

Step 1: Define Job Levels

Create Simple Framework:

Example for Tech Startup:

Level 1: Associate (0-2 years, entry-level)
Level 2: Professional (2-5 years, independent)
Level 3: Senior (5+ years, mentors others)
Level 4: Lead (technical/team leadership)
Level 5: Principal (strategic leadership)

Apply to Current Team:

• Assign each person to appropriate level
• Based on responsibilities, not current pay
• Document criteria for each level

Cost: Free, just time investment

Step 2: Research Market Rates

Free/Low-Cost Data Sources:

Free:

• Glassdoor salary data
• Salary.com free reports
• Bureau of Labor Statistics (BLS) data
• Industry association surveys
• LinkedIn salary insights

Low-Cost ($100-500/year):

• PayScale individual subscriptions
• Salary.com basic plan
• Industry-specific surveys

Networking:

• Local startup/business groups
• Peer conversations (what are you paying?)
• Recruiter insights

Example Research:

Role: Marketing Manager, Seattle
Glassdoor: $70K-$95K
Salary.com: $75K median
BLS: $74K median for metro area
Peer company: Paying $78K

Market estimate: $74K-$78K for median
Range: $65K-$90K for full span

Cost: $0-$500 depending on depth

Step 3: Create Salary Ranges

Simple Formula:

1. Determine market median for each level
2. Set range as ±15-20% from median
3. Document ranges

Example:

Level 2 Professional - Marketing:
Market median: $76K
Range: $65K-$90K (±17%)

Positioning within range:
- Entry to level (0-1 yr in role): $65K-$72K
- Mid-level (2-3 yrs): $72K-$82K
- Top (4+ yrs): $82K-$90K

Cost: Time only

Step 4: Review Current Salaries Against Ranges

For Each Employee:

1. Compare current salary to range
2. Assess if positioning makes sense
3. Identify gaps

Common Findings:

• Some employees below range minimum
• Inconsistent positioning within ranges
• Legacy inequities

Example:

Sarah - Marketing Professional
Current: $78K
Range: $65K-$90K
Experience in role: 4 years
Expected: $82K-$90K
Gap: $4K-$12K underpaid

Action: Plan remediation

Cost: Time only

Step 5: Budget for Equity Adjustments

Calculate Total Need:

• Employees below range minimum: Immediate priority
• Employees poorly positioned: Phase over time
• Total cost estimate

Small Business Example:

15 employees
3 below range minimum: $18K total adjustment
5 poorly positioned: $25K total
Total: $43K (one-time or phased)

As % of $1.2M payroll: 3.6%
Phased over 2 years: 1.8% per year

Budget Options:

• Immediate if cash allows
• Phase over 2-3 raises cycles
• Prioritize most egregious gaps
• Include in fundraising plans

Implementing Fair Hiring Practices

Before You Post

Write Clear Job Description:

• Specific responsibilities
• Required qualifications
• Performance expectations

Set Salary Range:

• Based on market research
• Aligned with internal levels
• Actually used (not fake wide range)

Example Posting:

Marketing Manager
Responsibilities: [detailed list]
Requirements: 3-5 years marketing experience, bachelor's degree
Salary: $70,000-$85,000 depending on experience
Benefits: [list]

Cost: $0

During Hiring

Don't Ask Salary History:

• Focus on expectations and market
• "What are your salary expectations for this role?"
• Not "What do you currently make?"

Structured Offers:

• Use offer matrix based on experience
• Document rationale
• Get second opinion (co-founder, advisor)
• Compare to current team

Example Offer Process:

Candidate: Maria Rodriguez
Role: Marketing Manager
Experience: 4 years
Education: Bachelor's
Assessment: Strong

Offer guideline (4 yrs): $75K-$80K
Offer: $78K

Comparison to current team:
- Sarah (4 yrs): Adjusting to $82K
- New hire should be similar
- Adjust offer to $80K for equity

Final offer: $80K

Cost: $0, just discipline

Ongoing Practices

Annual Compensation Review

Process:

1. Update market data (annual)
2. Review and adjust ranges if needed
3. Assess each employee's positioning
4. Allocate raise budget equitably
5. Document decisions

Raise Distribution:

• Set overall budget (e.g., 3% of payroll)
• Allocate based on performance and equity
• Larger increases for those below range or equity gaps
• Smaller for those well-positioned
• Document criteria

Example:

Total raise budget: $36K (3% of $1.2M)

Distribution:
- Sarah: 8% ($6.4K) - correcting gap + performance
- Mike: 3% ($2.8K) - solid performance, well-positioned
- James: 2% ($1.8K) - good performance, already top of range
- [continues for all employees]

Used $34K of $36K budget
Average: 2.8%
Focused on equity while rewarding performance

Cost: Time + raise budget (would spend anyway)

Promotion Process

Criteria for Promotion:

• Performing at next level for 3-6 months
• Has skills/competencies for level
• Need for role at organization
• Not just tenure

Salary with Promotion:

• Move to minimum of new range if below
• Typically 8-15% increase
• Position appropriately in new range

Example:

Mike: Associate → Professional promotion
Current: $55K
New range: $65K-$90K
Experience: Now 2 years
Promotion increase: 10% = $60.5K
Position for 0-1 yr in new level: Should be $65K-$72K
Final: $65K (18% increase to meet range minimum)

Cost: Budget for promotions (planned business expense)

Low-Cost Tools and Resources

Free Templates

Spreadsheets:

• Compensation tracking
• Offer calculators
• Salary range documentation
• Use Google Sheets (free)

Documentation:

• Compensation philosophy (Google Docs)
• Offer letter templates
• Raise decision forms

Low-Cost Software (Under $100/month)

HRIS Platforms:

• BambooHR ($150/month for 15 employees)
• Gusto ($40/month base + per employee)
• Rippling (varies)

Compensation-Specific:

• Pave (pricing for small businesses)
• ChartHop (compensation planning)

Survey Participation:

• Join industry surveys for free data access
• Local chamber of commerce
• Professional associations

Expert Help When Needed

When to Get Professional Help:

• First comprehensive audit
• Remediation planning
• Preparation for fundraising/M&A
• Crossing regulatory threshold
• Discrimination complaint

Affordable Options:

• HR consultants (vs. big firms)
• Law school clinics
• SCORE mentors (free)
• Industry associations
• Online services (Upwork for research)

Budget: $2K-$10K for focused projects

Special Small Business Considerations

Equity Compensation

Pay Equity Includes Equity:

• Stock options/grants are compensation
• Should also be equitable
• Similar roles get similar equity

Best Practices:

• Equity ranges by level (like salary)
• Consistent strike prices
• Clear vesting schedules
• No gender/demographic disparities

Founder/Early Employee Discounts

Common Issue:

• Founders' friends worked "cheap" early on
• Now underpaid relative to market
• Retention risk and equity issue

Solutions:

• Bring early employees to market rates
• Frame as investment in retention
• Equity grants to compensate if cash-constrained

Rapid Growth Challenges

Problems:

• Hired 3 engineers at $80K, $95K, $110K in 6 months
• Market didn't change, just inconsistent offers
• Creates internal inequity

Prevention:

• Set ranges before growth spurt
• Maintain offer discipline
• Regular equity audits during scaling
• Budget for adjustments

Family Business Dynamics

Challenges:

• Family members may be paid differently
• Relationships affect pay decisions
• Informal practices

Best Practices:

• Apply same frameworks to family
• Document rationale for differences
• Separate family relationship from business decisions
• Especially important to avoid discrimination against non-family

Sample Small Business Compensation Policy

[Your Company] Compensation Philosophy

Our Commitment: We are committed to fair, transparent, and competitive compensation for all employees regardless of gender, race, ethnicity, age, or other protected characteristics.

Market Positioning: We target the 50th percentile of market rates for similar companies in [location/industry], with the ability to pay up to 75th percentile for exceptional performance and critical skills.

Salary Structure:

• We maintain salary ranges for all positions based on market data
• Ranges are reviewed and updated annually
• Individual positioning within ranges reflects experience, skills, and performance

Pay Decisions:

• Starting salaries based on experience, skills, and market data
• We do not ask about or use salary history
• Raises based on performance and equity considerations
• Promotions include salary adjustment to new range

Transparency:

• Salary ranges available to all employees
• Annual compensation review process communicated
• Questions about pay welcomed

Review and Monitoring:

• Annual pay equity review
• Remediation of identified gaps
• Continuous improvement of processes

Action Plan for Small Businesses

First 30 Days: Quick Wins

Week 1-2:

1. Stop asking salary history
2. Collect current compensation data
3. Identify obvious equity issues

Week 3-4:

1. Research market rates for key roles
2. Create simple job levels
3. Draft salary ranges

Cost: $0-$500 and time

Months 2-3: Foundation

1. Document compensation philosophy
2. Review all current employees against ranges
3. Budget for equity adjustments
4. Implement structured offer process

Cost: Time + equity adjustment budget

Months 4-6: Implementation

1. Make priority equity adjustments
2. Train hiring managers
3. Update job postings with ranges
4. Establish annual review process

Cost: Time + adjustments

Ongoing: Maintenance

1. Monitor new hires for equity
2. Annual market rate review
3. Equitable raise distributions
4. Quarterly check-ins

Cost: Incorporated into normal operations

Conclusion

Small businesses can build equitable compensation practices without big budgets:

Key Principles:

• Structure over ad hoc decisions
• Market data over negotiation
• Documentation and transparency
• Regular monitoring
• Invest time even if limited budget

Benefits:

• Attract and retain talent
• Prevent costly problems
• Prepare for growth
• Demonstrate values
• Competitive advantage

Start Small:

• Don't let perfect be enemy of good
• Simple structures better than none
• Improve iteratively
• Build foundation now

Pay equity is achievable for every business regardless of size. The key is commitment and consistent practices.

This guide provides general information and should not be considered legal or professional advice. Small businesses should consult qualified experts for specific guidance on compensation practices and legal compliance.