For me, one of the most intriguing sessions at the Bottom Lines Summit will be about fair compensation—“What’s a Living Wage?”

In small businesses, compensation is often something that just sort of happens, rather than something that’s the result of a clear strategy or conscious process. We’re often working in a near vacuum when we set wage rates in our companies; we’re often only dimly aware of what the “going rate” is for a particular position, let alone what a fair wage would be (not necessarily the same as the going rate).

I’ve been involved in attempts to do serious, rigorous market wage surveys, and they run into these sorts of problems:

• Even for the same job title (“lead carpenter,” for instance), actual duties and responsibilities are all over the map. At one company a lead carpenter may be responsible for placing all the special orders and generating change orders; at another, those tasks might be done by someone in the office. Different levels of responsibility warrant different compensation, even if the job title is the same.
• It can be even harder to make apples-to-apples comparisons with regard to benefits packages. Is access to a  company truck worth more or less than using your own vehicle and getting reimbursed for mileage, for instance? Is steady overtime pay more valuable than being allowed to work less than 40 hours a week? My crew averages about 38 hours a week; clearly, to them, personal time is more valuable than overtime pay.

So “fair” compensation is, at some levels, more art than science. It’s no surprise we often rely on gut instinct more than strategy. When we talk about fair compensation we’re really asking ourselves three questions:

1. What’s fair when compared with other workers who have a similar level of skills and responsibility in our industry and in our region?
2. What’s fair when compared with others in our own companies, relative to experience, responsibility, and competence?
3. What’s fair in the context of what it takes to be able to eventually buy a home and send a child to college or support an aging parent or ill spouse without absorbing crushing debt? This is where MIT professor Amy Glasmeier’s important Living Wage research comes in.

My current opinion is that you probably offer a fair compensation package to your employees—that, one way or another, you’ve answered all three of those questions satisfactorily—if you meet these conditions:

You don’t have a revolving door: at least some of your employees have been on board for several years.  Longevity and loyalty are possible indicators that you hire well and keep people engaged and interested in the work. Be careful, though: it’s a major hassle to change jobs (an economist would say that the “transaction costs are high”). The pain of staying in a position needs to be even greater than the pain of finding a new position for an employee to be motivated to quit. This means you could have some employees who’ve been around for a while who are not fundamentally that happy with their job, but also not so unhappy that they’re inclined to leave. So longevity is a possible indictor of fair compensation, but not a sure-fire indicator.

You’re able to attract competent new employees when needed. Since the transaction costs of changing jobs are high, the rewards for doing so also need to be high. Part of the reward can be just the fact of leaving an unsatisfactory situation; part of the reward is often higher compensation at the new position. If you don’t have problems finding people willing to take a position at your company, it’s a reasonably good indicator that your pay scale is in line.

You know what the law is—and follow it—with regard to employee versus subcontractor classifications. Small construction companies have a bad habit of cheating employees out of some critical benefits – workers’ comp coverage and Social Security contributions in particular – by paying them as subs rather than employees. In my opinion, if this is your practice, by definition you’re not offering a fair compensation package.

You’re not afraid that employees at your company might find out what the others make. This, to me, is potentially the most reliable indicator that your compensation is fair. When I have been afraid of employees finding out each others’ compensation packages in the past, it’s been because that compensation has been capricious, based on longevity rather than value to the company (except that the new guys sometimes got more than the old guys, regardless of value), or included a component of “hush” money: paying the most to those who squawked the most about their pay. But as a company moves towards a system of job descriptions and evaluations coupled with a logical range of pay within each job description, it becomes easier to feel comfortable about being open-books about compensation. It can even make the evaluation process more honest and useful.

The Living Wage session at the Building Energy Summit promises to be an extraordinary opportunity to engage business your peers in an essential conversation about what a fair wage is—a conversation we business owners have too rarely, and too often just on our own.