When it comes to offering benefits to their employees, small-business owners don’t have the leverage that large companies do. But there is a long laundry list of benefits that small-business owners can use to attract and retain employees, according to experts participating in a recent MarketWatch panel discussion in San Francisco, all of whom count many small-business owners among their clients.

Indeed, small-business owners can offer cash compensation, equity options, cafeteria plans, life insurance, health coverage, disability and fringe benefits, according to Tim Kochis, the founder and president of Kochis Global; Frank Paré, the founder and president of PF Wealth Management Group; and Richard Stone, the founder and chairman of Private Ocean.

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But which of these benefits are most relevant and important to small-business owners? Which ones should they offer their employees?

Cash is king

“The obvious one is cash,” said Kochis. “People like being paid—and not just cash salaries but also, very importantly, bonuses for performance. It’s a great way to reward the kind of performance you’re looking for, a great way to incent. There’s a classic saying that you get what you pay for and this is very true in terms of compensation.”

Small-business owners shouldn’t, however, provide competitive cash compensation in the absence of employee objectives. “If you establish objectives that people will be rewarded especially for, that’s exactly what they will do. And so cash compensation including bonus is really important,” said Kochis. “That’s the ground-level compensation opportunity.”

For his part, Stone agreed that small-business owners need not look at exotic employee benefits. Rather, they should look at basic employee benefits, such as health insurance. “To be competitive you need to have some type of health-insurance element,” said Stone. (Read “Will Obamacare help or hurt your business?”) He suggested that business owners put in place a health-insurance plan that has family coverage with a copay sharing arrangement. “It’s not usually (the) employer paying 100%,” he said.

Small-business owners should also put in place a 401(k) or SEP-IRA retirement plan, such as a 401(k) plan or SEP-IRA, said Stone. (Read “Retirement: Help your employees, help yourself.”) However, owners shouldn’t be surprised if employees, especially younger employees, don’t contribute to an employer-sponsored retirement plan, even if there’s a matching contribution from the employer. “Younger employees opt for cash compensation versus a retirement contribution,” said Stone.

“Humans are basically motivated to move toward the thing that’s going to compensate them the greatest. So if you target something that’s going to be productive for the health of your company and going to get the proper compensation package around that, then the employees will follow and move toward that target,” said Stone. “Basically it revolves around cash.”

What are your demographics?

To be fair, what benefits small-business owners put in place to attract and retain workers depend in large part on the demographics of the workforce. Younger workers care more about cash, but older workers tend to want insurance.

The right benefits package can help a small business hold on to top-notch talent. Shutterstock.com

“Insurance, health insurance, disability insurance: These are things that tend to appeal to people later in their life,” said Kochis. “As they think about their own mortality they think about their own health risks.”

By contrast, he said, very young employees, who view themselves as invincible, tend not to think in those terms. “They’re thinking in terms of ‘What do I have available to me today?’”

Kochis said small businesses ought to consider the makeup of their workforce and what benefits would be most relevant. “If they’re all under 30, then life insurance and even health insurance are probably not that important,” he said. “If they’re in their 40s and 50s then it becomes considerably more important.”

Paré agreed with Kochis, but also noted that small-business owners should consider a bigger menu of benefits to attract and retain older workers. “You have younger workers who are coming in with different set of expectations and you have baby boomers who are shifting in terms of their work,” he said.

For instance, the standard benefits could include health insurance and an employer-sponsored retirement plan such as a 401(k). After that, small-business owners might consider adding non-qualified stock options or a section 125 “cafeteria” plan, which allows employees to pay certain qualified expenses such as health insurance premiums, adoption assistance, dependent-care assistance, group-term life insurance coverage, as well as contribute to health savings accounts on a pretax basis, thereby reducing their total taxable income and increasing their spendable/take-home income. (Read the Internal Revenue Service’s FAQs for government entities regarding Cafeteria Plans.)

In addition, the panelists suggested that business owners might have to be creative in terms of the benefits they offer. “We’re seeing a big change coming through right now,” said Stone. “Many employees would rather trade off compensation for certain lifestyle things—changing their workweek around, changing their hours, taking a day off and so forth.” Stone said that some people at his own company were agreeing to lower cash compensation in return for more flexibility.

Not all small-business owners will be able to offer nontraditional benefits, however. “In one sense it’s easier for them because they are small—they can do things that are ad hoc,” said Kochis. “But it’s also more difficult for them because they don’t have a large number of employees who can fill in the slack for people who want to have Friday afternoons off, for example.”

No need for ESOPs

In the main, small-business owners—save those in the high-tech world—don’t need to offer stock options and the like as an employee benefit. For one, young workers want cash. Plus, many owners aren’t in a position to offer equity. “The person that’s going to be coming into the more typical small businesses [is] looking for that cash compensation,” said Stone. “Because the reality is equity options is not an opportunity for them. Those small employers just aren’t in a position where they’re going to start distributing equity very early on to very young people with an unproven track record.”

What is possible, however, is what Stone referred to as a simple buy/sell agreement. A buy/sell agreement is a binding agreement used by sole proprietorships, partnerships and close corporations that governs what happens to an individual’s ownership interest when that individual withdraws from the business, dies or becomes disabled.

That, Stone said, can be the “backbone of an equity distribution scheme over time for a company that wants to retain its really key employees by sharing the ownership of the business.” What’s more, he said such agreements can be done relatively simply.

What’s the right compensation?

The experts also addressed how to determine the appropriate level of cash compensation to attract and retain employees. For his part, Paré said small-business owners should get a sense of what their “competition is doing to bring in high-quality employees” and determine whether it’s possible for them to match or better those benefit packages.

Of note, private-industry employers spent an average of $29.63 per hour worked for total employee compensation in December 2013, according to the Bureau of Labor Statistics. Wages and salaries averaged $20.76 per hour worked and accounted for 70.1% of these costs, while benefits averaged $8.87 and accounted for the remaining 29.9%. These are among the findings of the federal government’s December 2013 Employer Costs for Employee Compensation report.

“I think it’s really important on the business owner to look at their own industry to determine what to pay, and then I think what they’re doing is basing themselves on being competitive in the marketplace structuring their overall benefit plan,” said Paré.

Indeed, Kochis said the competitive landscape will determine what benefits a small-business owner’s benefits strategy. “Whether they’re under 50 employees or over, they will ultimately have to respond to their competitive landscape,” said Kochis. “That is the driver. It’s not whether the law requires it. It’s: In order to attract and retain the kind of employees they want, what kind of [benefits] do they need to provide.”

Also in our Small Business Benefits package:

Retirement: Help your employees, help yourself

Will Obamacare help or hurt your business?

Kickball, yoga and you: Investing in employee wellness

Graceful exits: The right way to leave your business

Robert Powell is editor of Retirement Weekly, published by MarketWatch. Follow his tweets @RJPIII. Got questions about retirement? Get answers. Send Bob an email here.