Did you know that almost one-half of startups fail in the very first year of beginning operations due to many different reasons, and not having a proper HR strategy is one of them? Now we often think that HR is something big companies, and conglomerates focus on, but that is far from true. HR management is critical for all types of businesses – be it SMEs, startups or corporations.

HR Strategies for SMEs and Startups

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In this article, we will shed light on 1) what HR management is, 2) what challenges HR managers face, 3) building HR strategies for SMEs, and 4) top 5 HR strategies for SMEs and startups that can take your small business or startup to great heights. Without much further ado, let us first understand what HR management really is and its two types.


HRM, short for Human Resource Management, is an internal function within an organization with the purpose of maximizing employee performance for reaching the company’s strategic goals. The Human Resources department is primarily concerned with managing people within organizations while keeping in line with the policies and systems of the organization.

Human Resources branches out into two types – reactive and proactive human resource management. We will talk about these types later in the article when discussing the right HR strategies for SMEs and startups. Now you may be wondering what huge difference HRM could make as far as small business enterprises and startups are concerned, so here is what you need to know.

  • Human resource management helps ensure that small businesses have the right number of employees to meet customer demand and run business operations smoothly.
  • It analyzes the impact of internal and external changes with respect to the environment as well as the need for new sets of skills and experiences for venturing into a new market, dealing with competition, or adjusting to changing economic pressure.


Key Challenges of HR in SMEs and Startups

Paying attention to HR in small businesses and startups is not that common which is why HR managers face certain key challenges in trying to make entrepreneurs see how Human Resource Management can help take their business to new heights.

According to a study conducted by The Society for Human Resource Management (SHRM), here are some of the challenges that HR managers are most likely to face within a span of 10 years.

  • Almost 59% feel that retaining and rewarding top employees is a major issue
  • While 52% think that developing the next generation of leaders is a tough challenge
  • Lastly, 36% feel that creating a work-friendly culture attracts the best and the most talented employees

Now the main question is what can be done to counteract the problems mentioned above? Here are some solutions that can help you motivate and encourage your staff to put in their 100% and strive to become leaders.

In order to retain top talent and reward them generously, it is important to provide employees with work flexibility. Gone are the days when work from home days used to be the goof off days. You can now carefully monitor the performance of employees, or at least offer flexible office hours, to facilitate top talent and satisfy both the employees and the employer.

SMEs have the opportunity to create a work-friendly, easygoing environment with an open culture so the employees can relax and focus on work. HR managers working in such small-scale companies can easily resolve work-place problems by having one-on-one interactions with the employees and share valuable information.

Every employee wants to go far in their professional career and a company with few top positions cannot offer as many promotions and rewards as a big corporation would. In such a situation, HR managers can move employees laterally to enrich the work experience by offering them the chance to learn new skills, job share or cross train. You can also throw in some extra perks like providing top talent a chance to visit industry conferences or other events to add value.

No doubt, SMEs and startups cannot compete with bigger corporations when it comes to offering glamorous salary packages and benefits. Make sure you offer a competitive salary and offer as many benefits to your team as possible, such as health insurance, life insurance, retirement plans, etc. In order to sweeten the deal even more, offer soft benefits like flexible hours and performance-based benefits like profit sharing.

Key Objectives of HR in SMEs and Startups

HRM for small businesses and startups is different from that of big corporations because the challenges they face and the objectives they seek to gain vary from one another. HR professionals strive to establish effective performance management in order to identify development opportunities, reward excellence, and provide disciplinary or remedial actions when necessary.

To achieve the maximum level of profitability and success, an HR professional will align each employee’s work with the strategic goals of the firm and also ensure that the staff is well aware of the required actions and behaviors by setting clear-cut performance expectations in job descriptions. Take a look at some of the key HR objectives that apply to SMEs and startups:

1) Develop a Competency Model

The main objective of an HR department is to hire the right people for the right jobs keeping in mind their skills, expertise, and education. This objective is achieved by setting clear job descriptions, establishing job competency models for each department in the company and benchmarking roles against similar jobs in the industry.

In order to ensure smooth running of the business, HR professionals will take into account studies and data related to staffing, transactions, and costs and then create a competency model accordingly.

2) Define Organizational Dimensions

HR strategies are developed according to the aspects of the organization. It is also interesting to note that the prevailing culture of the company not only has a critical impact on the HR strategies devised but also represents the management style and values of the organization. Defining the organizational dimensions will give you an idea on how the organization is going to be more or less – will it be an organization that expects employees to ‘do more with less’ or will it be overstaffed in order to give way to innovation and experimentation?

Some other key factors that directly impact the HR strategies devised are the nature of business done by the organization, the chain of command and the structure of the organization itself. In order to effectively hire and retain staff to achieve strategic goals of the organization, human resources systems, policies, and practices are also taken into account.

3) Define Role of Mission, Vision, and Values

The mission, vision and values of the small business or startup play a crucial role in shaping the HR strategies and objectives for the future ahead. The mission of the organization will help you understand why the business exists and who it serves while the vision statement basically provides insights on what the organization hopes to achieve and where it sees itself in the future.

The values of the organization are beliefs that serve as a driving force behind the operations and actions of the organization. All three – the mission, vision and values of the organization directly impact the type and number of employees needed to meet the organizational goals.

4) Perform Workforce Analysis

A workforce analysis is considered a key part of the human resource strategy and focuses mainly on the organization, its culture, people, and the systems that have been implemented. Doing a workforce analysis is helpful in analyzing the current situation of the company in terms of the elements discussed above and where they ideally want to be in the years to come.

Identifying the gaps in these areas will enable the HR professionals to come up with specific objectives designed especially to bridge these gaps.

5) Evaluate Implemented Strategy

All HR strategies are guided by evaluation based on specific, measurable factors. A small business or startup will consider a wide variety of factors for developing, implementing and evaluating the effectiveness and performance of its HR strategy. Usually, doing an evaluation will give you accurate facts and figures on employee turnover, number of vacant positions, customer complaints, and employee grievances along with the satisfaction and dissatisfaction levels of both customers and employees.


In order to build a solid HR strategy for small and medium enterprises, you should follow these three steps.

Step 1 – Organize

The employee handbook of the organization serves as a blueprint for building an enduring workforce and believe it or not; without it, the chances of HR success are very slim. The best way to make sure your employees are fully informed about what to do and what not to do is to come up with an employee handbook that is easy to understand, consistent in tone and viewpoint throughout.

Some of the most important key points you must incorporate into the employee handbook are:

  • Code of conduct for all employees
  • The organization’s policies and protocol related to use of technology and communications within the workplace
  • Employee benefits such as worker’s compensation, paid vacation (if any), and health insurance
  • Employee evaluations including pay raises and disciplinary procedures
  • Termination and retirement policies of the firm

When preparing content for the handbook, remember to be judicious with your phrasing and never leave anything to the reader’s imagination. Clearly define everything to avoid problems and misunderstandings later. Just like any other official document, the handbook must also be written in detailed prose and organized scrupulously.

Also, remember to maintain records of all employees of at least five years after termination either voluntary or otherwise for future reference.

It is also important to understand that HRM is widely neglected in startups and emerging small businesses. However, it is best to invest your money where it counts – in the people who will take your business to the zenith of success. The reason behind ignoring HR in small companies is not because the entrepreneurs are not proactive when it comes to staffing, but due to lack of awareness because 90% of company founders usually come from an engineering, sales or finance background with little or no knowledge about the field of HR.

But the good news is, almost 88% of the leaders of Top 50 companies believe that building the HR system from day one proves to be fruitful in the long run because it helps in retaining top talent in the company; eventually leading to better growth. Having an HR system in place from conception is important because it enables HR professionals to find and keep top-notch people in the company, offer them enough benefits to make them stay and be able to meet the organization’s objectives.

One of the easiest and most economical ways to expand your firm is to make acquisitions. Once again, growing the firm through acquisitions is not quite popular among entrepreneurs today but it is indeed one of the best strategies to grow exponentially without making a hefty investment. The main reason why entrepreneurs are not usually keen on making acquisitions is because they are hung up on the fact that their company’s assets and products should be brand new in order to own them truly.

Another misconception that keeps entrepreneurs from acquiring other businesses is that the process is confusing, time consuming and overly complex. But have you ever wondered how successful your business venture could be if you play your cards right and acquire the right business? Four young business moguls of Hot 50 companies are extremely successful in their respective fields today just by buying other companies.

Here are some reasons why making acquisitions is the right move for those who are looking for cheaper, easier and more convenient ways to expand:

  • You get quick access to the market.
  • The assets of the existing company are all yours at real value.
  • No need to hire new employees – train the existing staff for a highly productive work output.

Outsourcing is also a great strategy that enables the firm to maintain its focus entirely on what it does best. From marketing experts to call centers for customer care, outsourcing is the new ‘in’ thing that cuts costs and helps SMEs and startups run more efficiently. Perhaps the greatest benefit of outsourcing work is that you don’t have to pay the employees full time or give any extra benefits as you would if you hired a professional employee full time.

The only two misconceptions that keep entrepreneurs from going down the road of outsourcing is that they feel like they are giving up control and that there is no way outsourcing work could actually be cost effective.

Step 2 – Motivate

Sometimes finding smart employees and highly talented workers is not an issue, but making them stay and work at your company for long is a daunting task that baffles many entrepreneurs. It is important to remember that just one paid vacation policy could go a long way when it comes to retaining top-notch talent in your company.

But having a paid vacation policy is not going to cut it; you need to focus on what is going on at the workplace too. It is always the small things that make a difference and will make your employees stay. Here is what you need to do to attract and retain talent in your firm effectively.

  • Recognize employee contributions – in public and private forums
  • Acknowledge your team members as unique and notable humans with a unique set of skills and talent
  • Send ‘Get Well Soon’ cards if your staff member is sick
  • Ask your employees to give you feedback related to professional development from time to time
  • Seek input from employees related to business and industry challenges and acknowledge their suggestions out loud
  • Make the work environment aesthetically appealing, pleasing and warm

Step 3 – Retain

Offering a paid vacation to your staff members will cost you much less than the hefty amounts you will lose if the employee turnover rate is high. Consider personalizing the work environment using innovative and creative methods in order to make your staff members want to work for you and you only. For instance, ‘Pet-Friendly Fridays’ or ‘Work from Home Wednesdays’ seem like a great plan to instill a friendly and warm environment for your employees to work in.

If you are not entirely sure what your employees would like, ask them to give you valuable feedback and then come up with new ideas that will please you as well as your employees. When it comes to retaining employees, remember that an HR strategy implemented unilaterally from above will not make a difference as much as one created by a team and implemented over time through appreciation and mutual respect.


Believe it or not, having an understanding of the latest human resource trends can really make a world of a difference as far as SMEs and startups are concerned. Take a look at the 5 best HR strategies specifically tailored to the needs and requirements of startups and small businesses.

1) Improve Employee Satisfaction

Business owners must understand that employees are their company’s greatest assets, and it is absolutely critical to make sure that they are fully satisfied with their position and role in the company. Some potential benefits of taking care of your work staff’s needs and wants are improved morale, high productivity, sense of commitment, loyalty, and lower employee turnover rates.

Employee satisfaction can be increased through a number of tried and tested monetary and non-monetary benefits aligned with the current financial situation of the company and its mission, vision, and goals.

2) Construct Fair and Equitable Compensation Strategies

One of the perks of working for a successful company are its fair and equitable compensation strategies because it is the one thing that dictates the fixed cost that the company incurs yearly as well as the satisfaction level of the work staff. When determining compensation levels for your company, make sure you look around and do some research on the latest compensation plans.

It is also just as important to keep in mind that consistent compensation requirements must be established according to the pay grade to ensure all employees are compensated fairly and equally.

3) Design Effective Training and Development Programs

As an entrepreneur, your primary goals should be to increase employee retention and promote growth within the company by designing useful and effective training and development programs. The new employee orientation program is one of the standardized and common initiatives that must be implemented. This will not only inculcate a sense of commitment in the minds of the new employees early on, but will also increase satisfaction.

A mentorship program is also a great idea in which low-level employees are paired with senior mid-level employees for a one on one training and development session. By doing so, you will make your employees more informed about the goals and vision of the company and offer them an opportunity to learn new skills.

4) Implementation of Legal Employment Practices

It is critical for small business owners to ensure that their hiring practices are in line with the legal employment rules and regulations. All entrepreneurs must understand common employment laws in order to reduce the chances of violating them and bearing the consequences later.

The best way to implement legal employment practices is to hire a legal specialist or a seasoned HR professional to draft an employee handbook.

5) Picking what is Right for Your Business – Reactive or Proactive Human Resource Management

The main difference between proactive and reactive human resource management is planning and forethought. While proactive HRM will help you identify and solve the problems with employee training and staffing right from the start, reactive HRM will be a much more cost-effective option for small businesses and startups.

Here is how both these strategies work and how they are different from one another in a variety of aspects.

  • A proactive recruitment strategy is more focused on catering to the staffing needs of your business while a reactive strategy will only work if there is a job opening for a position in the company.
  • When it comes to HR risk management, a proactive strategy will enable you to anticipate issues in staffing levels and employee training effectively while reactive HRM will propose a solution when a crisis occurs.
  • A proactive HRM strategy will offer top talent a whole bunch of benefits to attract them and make them stay. On the other hand, a reactive strategy will only secure the best workers who happen to apply for a job at the company rather than seeking the best of the best from the entire industry.
  • With tight overhead costs, proactive HRM strategies are expensive while reactive HRM is cheap and better suited for companies in their initial stages.

We hope that this article gave you deep insights on human resource management, how it works, its functions and the best HRM strategies that small business owners and startups can use to take their business operations to the next level.

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