In the present labour market where talent is scarce and competition is fierce, many SMEs and family-owned businesses are feeling the pressure to raise wages just to keep key people on board. But reacting with ad-hoc pay rises—especially when employees show up with better offers from competitors—leads to inconsistency, resentment, and financial instability.

Building on my previous article about the underestimated value of HR leadership, today’s article explores the urgent need for a structured remuneration framework tied to performance, especially in light of the EU Pay Transparency Directive, which is now reshaping employer obligations across Europe.

It’s become common for SMEs and family businesses to raise wages when a valued employee threatens to leave. While this might retain the person in the short term, it creates significant long-term problems:

• Creates a Culture of Ultimatums: Employees learn that the way to a raise is through external offers, not internal merit.

• Destroys Internal Equity: Others who have been loyal and high-performing may feel neglected, fostering resentment.

• Strains Budgets: Ad-hoc increases aren’t forecasted or aligned with business performance, risking financial imbalances.

• Undermines Employer Brand: It signals that the business only responds under pressure, not through strategic planning.

To prevent this spiral, SMEs and family businesses must get ahead of the curve—by linking pay to performance and building a culture of transparency, consistency, and fairness.

The EU Pay Transparency Directive, adopted in 2023 and coming into force by 2026, requires employers to embed fairness and objectivity into their pay systems. Below are some of the core employer obligations under this directive:-

• Salary Transparency in Job Posts: Employers must disclose pay ranges up front—leaving no room for vague or inconsistent negotiations.

• Right to Know: Employees can request information about pay levels for comparable roles, making internal equity non-negotiable.

• Gender-Neutral Pay Frameworks: Pay systems must be based on objective, performance-related criteria—ruling out arbitrary or relationship-based increases.

Even if your SME isn’t legally required to comply now, these standards are fast becoming the norm—both for attracting talent and for operating responsibly.

To address both internal challenges and external pressures, SMEs and family businesses should implement a structured, performance-linked pay strategy that is based on the below principles:-

• Setting Clear Performance Goals: Use SMART metrics so employees understand how their results tie to compensation.

• Regular Performance Reviews: Establish a culture of continuous feedback, not just annual reviews.

• Reward on Merit, Not Pressure: Create salary bands and bonus structures based on results—not based on who knocks loudest or threatens to leave.

• Use Benchmarking Tools: Stay competitive in the market by benchmarking roles and salaries regularly—not reactively.

Family-run business often value loyalty and informality, but this can lead to inconsistent pay practices. To avoid this it is important that family businesses & SMEs set clear governance mechanisms for pay decisions, also to have equal treatment of family and non-family employees and use objective data and performance reviews to drive salary discussions.

By implementing a performance-linked, solid remuneration strategy, businesses can achieve a higher Retention as high performers stay when their work is recognised and rewarded consistently, whilst building a stronger culture as employees trust the system when it’s fair and predictable. Moreover a structured remuneration system allows business to plan ahead and avoid knee-jerk budget hits.

In today’s tight labour market, reactive wage increases based on competitive threats are a losing game. SMEs and family businesses must move from survival tactics to strategic action. A structured, performance-linked remuneration strategy not only meets legal expectations under the EU Pay Transparency Directive but also builds the kind of workplace where people want to stay—and grow.