From the March 2006 issue of Entrepreneur

Small businesses hired fewer people but paid them more at the end of 2005, reversing a trend in the SurePayroll Hiring Index that lasted more than a year. "We've seen a shift in the data," says Michael Alter, president of Skokie, Illinois-based payroll service SurePayroll. "There have been three down months of hiring, and [for] five of the last six months, salaries have been rising."

In November, the nationwide hiring index reflected a downtrend that began in September and negated most of the gains brought about by the slow expansion of small-business hiring during the first part of the year. Indications were the year would end with a meager 0.3 percent increase in the number of people on small-business payrolls, based on a count of paychecks issued to SurePayroll's 15,000 small-business customers.

As hiring dropped slightly, salaries went the other way. SurePayroll's Pay Index rose five of the past six months prior to December, partially undoing a drastic fall in small-business salaries that began in 2004. Small-business salaries across the nation averaged $28,888 annually. That was down 1.28 percent for 2005, but much better than 2004's 4.4 percent slide.

Together, the trends indicate that small-business employers are emphasizing quality over quantity when it comes to hiring and compensation. "That says to me they're paying their good workers more money to keep them, or they're trading out the poor performers for better employees," Alter says.

Use of contractors showed little change, and in the Northeast, hiring levels continued to rebound as the region recovered from 2004, when it did worse than other regions. Alter projects wages will likely keep climbing in the coming year, while hiring levels will stay soft. "We're seeing continued caution in small-business owners," he says. "They're not seeing the growth that other folks are seeing."