(FORTUNE Small Business) – Inflation is raising its head again, and economists are predicting average employee raises of 3% to 4% this year. Does that sound right to you as an employer? Does it sound fair or feasible? It should--and rewarding your people shouldn't stop there. Because satisfied employees add more to the bottom line than you might think.

I admit that I hate to pay business expenses, such as cable, cellphone service, electric, gas, insurance, rent, security, telephone, water, and the rest. The one exception is the line expense of staffing. I enjoy paying my people for their work, and I hope they reciprocate by giving their all. I like to pay very generously and competitively relative to the market in which I am competing. And you might consider that strategy too, because never forget, you are always competing. Just check out the classified ads, the Internet, the grapevine, employment recruiters, and professional associations to obtain a good estimate of the base salary, benefits, and bonuses being offered right outside your door. Then look at your own compensation. Do you compete?

Two lives ago I ran a company called Sport Physical Therapists, which operated in a market where the competition for recruiting licensed physical therapists to staff our 40 centers was as ruthless as the annual bridal sale at Filene's. Whatever we thought the salary range was, we had to think again. The supply of PTs did not meet the demand--from hospitals, nursing homes, and freestanding PT centers--and it put the therapists in the enviable position (like NBA free agents) of having the negotiation process tilted in their favor.

As the saying goes in professional sports: You're not paid what you're worth, you're paid what you can negotiate. So we decided that we should meet the demands of the therapists; then we went even further and exceeded their expectations. Because once a compensation package was agreed upon and both sides were happy, we ensured our chances of retaining employees by emphasizing "R&R."

Don't get me wrong: "R&R" in my world never means rest and relaxation. It stands for "recognition and remuneration." Sure, everyone wants holidays and vacation days and wellness days and sick days to recharge their batteries and enjoy a little fun in the sun, but such personal time can occur only periodically throughout the year. I want people with serious drive, instead of ones with an ambition to park their butts more often.

The R&R structure that I have always relied on is based on merit and encompasses all aspects of compensation--money, time, recognition, acknowledgment, and respect.

Health and dental insurance, life and disability insurance, and various fringe benefits might be considered a vital part of the compensation package for salaried staff members. But when it comes to the "R" of remuneration, money talks and benefits walk. Employees don't always appreciate the cost factor in their overall benefits plan.

In general, workers want to see the maximum amount in their paycheck. And if a cash bonus lands in their palm at certain times of the year--anniversaries, birthdays, holidays, quarterly--all the better. Short-term incentive plans are currently in vogue, and for good reason. When you give someone a $1,000 bonus for finishing a project or sealing a deal or reaching a quota, the money has a strong psychological impact on that person. Moreover, it doesn't affect your pay scale the following year, because it doesn't raise her base salary. It's good for both sides.

For your most valuable employees, those you truly can't do without, you might consider sharing a piece of your precious equity. When I sold Sport Physical Therapists in 1993, I gave the top five people in my company 10% of the net profit to share. When I started the company, I promised those valued five a cut of the equity when I sold. Why? Not to get them to act like owners but because they were already acting like owners. I trusted them, and they me. Nothing was written down. I told them what they'd get when I sold, and my word was good enough.

Yes, green is great, but you can also reward employees with cash equivalents, such as a gift certificate for dinner, or a month of free parking, or some other small token of appreciation. This is where the "R" of remuneration begins to cross over to the other "R"--recognition. Every small-business owner should look for reasons and moments to recognize members of her team for increased effort, persistent positive attitude, and peak performance. Praise pays. Recognizing the tiny triumphs and small victories of your staff provides the psychic income necessary to propel it to additional success while strengthening its allegiance to your company.

You can bank on it.