Here’s a situation that has come up for many of my clients.

You are looking for an employee. You find someone really good. But that person is demanding a salary that is significantly higher than what you’re paying others at the same level.

Has this happened to you? It’s a sign of the times. Inflation is pushing up costs, the labor market is tight and skilled workers are in short supply.

So, what do you do? Do you pay more? Or do you stick to your guns and let this talent slip through your hands? It’s not easy. Here are some thoughts.

Is paying more the right choice?

One option is to pay more and hope for the best. Unfortunately, I don’t think that’s a great idea.

Paying one person more than others at the same level creates problems. It puts your entire compensation structure out of whack. It creates inequities. It sets a bad precedent. And let’s face it: It’s almost guaranteed that other employees will learn that this person is earning more money, and they’re going to want more, too.

Another option is to use the situation to address all salaries and adjust them equitably. As small business owners, we sometimes overlook pay discrepancies among our people and changes to what the market is offering; this can hurt us in the long term.

Of course, making these adjustments will be costly, so it may not be the best solution. But then again, during a period of inflation when labor is in short supply, you may have little choice but to make these changes and increase prices to maintain your margins.

One client of mine addressed this situation by paying the new employee higher wages but giving them a different title with more responsibilities. By doing this, my client was able to justify (at least to management) the case for a higher salary.

Should you adjust your benefits?

You can also play a little bit with the benefits you offer. By this I mean offering a candidate a little extra paid time off, or a few dollars towards their dependent care or health savings plan, or more flexible work from home options, in lieu of higher compensation. But this could conflict with how you offer benefits to your other employees, so you’ll have to be careful.

Another client of mine took a good approach to this problem. He hired a candidate, paid them the same salary that he paid others, but used the situation to revamp his company’s bonus plan to tie compensation to profits. By doing this, he ultimately provided compensation with the potential to exceed what the candidate initially requested. And yes, it created higher pay opportunities for other employees. But in my client’s mind, the more his company made, the happier he was to share with his employees. So far, that plan seems to be working well.

I’ve also seen a number of businesses over the past few years sell shares to their employees or form Employee Stock Ownership Plans. These plans can provide flexible compensation options where some employees can earn shares based on merit, title and other factors. A plan like this not only offers an employee benefit but also creates a way to gradually exit your business over a period of time.

Can you use your company’s culture as a selling point?

Finally, don’t forget about culture. Sure, a new hire may be looking for more compensation. And maybe a bigger company can pay that. But does that candidate really want to work for a larger and more bureaucratic firm? Maybe that person would enjoy working for a smaller business where there’s more opportunities, greater flexibility and a friendlier, more relaxed workplace. Sometimes financial compensation isn’t the most important thing.

The takeaway is that there’s no best answer here. Maybe it’s one of the approaches above. Or maybe it’s a combination of a few. That’s up to you to decide. But there’s no question that today’s labor market and rising costs are forcing all of us to address this issue. It’s not going away anytime soon.

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