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How small and medium-sized businesses are coping with recruitment and retention challenges

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Skills, recruitment and retention is becoming increasingly challenging for SMEs. We recently surveyed over 1,000 small to medium-sized companies for our report, ‘Resilience in the face of economic headwinds’, and found 61% of businesses reported a skills shortage for their sector.

Meanwhile, 59% of firms stated it has become increasingly difficult to retain employees over the past 12 months with 65% of companies having to increase salaries to recruit candidates.  

Sectors where skills shortages are most acute include agriculture (79% of business report skills shortages), education (78%), hospitality (71%), IT (68%) and healthcare (67%). Brexit was cited by nearly half of SMEs as a reason for the reduced candidate pool.

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How companies are responding

Working from home and flexibility had helped companies attract employees. Nearly six in 10 companies (58%) said working from home arrangements had enabled them to recruit from a wider talent pool, whilst businesses said that flexible working hours is now nearly as important as pay and benefits for many employees.  

What employees want

Flexible working hours was cited by 81% of SMEs as being important to new recruits, equal to pension and just below training and development (84%). Salary was, understandably, the key driver for new recruits (87%).  

Less important for employees was additional benefits, such as staff discounts, and medical insurance, which employees would be happy to organise directly.

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Flexibility is key

Six in 10 companies said they had introduced flexible working practices as a result of the pandemic, with 17% of firms already having flexible working in place. Those businesses that introduced flexible working practices highlighted improvements across a number of areas in their companies, including:  

  • Employee morale (73%) 
  • Staff retention (72%) 
  • Productivity (70%) 
  • Operating cost reduction (68%) 
  • Recruitment (74%) 

Retention hinders SMEs

Nearly six in 10 businesses said that retention had become more of an issue in the past 12 months, with 44% of companies saying they had lost employees to a competitor and 45% reporting that their staff had been poached by a larger business. Meanwhile, 41% of firms had seen employees retire during the previous 12 months.

When asked about measures put in place to boost retention, 93% of respondents said they had invested in staff retention. Measure included 36% of SMEs boosting training for staff, with 30% increasing bonuses and 28% paying higher salaries. One in five (20%) had started an apprenticeship programme to train younger employees, whilst a similar proportion had paid for employees to undertake formal qualifications.

John Phillipou, Paragon Bank Managing Director of SME Lending, said: “Working for an SME can be an enriching and exciting career choice as employees can progress quickly and have a large influence on how a business performs. However, SMEs are reporting skills shortages across the board, which is making recruitment and retention a challenge, as our survey found.

“SMEs are being more creative to attract and retain staff, with an increased focus on flexibility and training for employees. However, pay remains the number one priority for employees, particularly in an inflationary environment, which is adding to SME cost pressures.” 

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551