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This podcast is for small to medium business owners. You've got a lot to gain, a lot to lose, and business is tough; there's a lot at stake. Business acumen is what every business owner needs, it will make a profound difference to your business.
This podcast will cover marketing, positioning, branding, lead generation, selling, negotiating, customer service, managing staff, managing finances and accounts and much more.
https://www.businessveteran.com.au/
mark@businessveteran.com.au
Just how much should you pay your employees?
Should you pay on productivity? Should you pay for good performance? Here's one: Should you pay depending on how much value they bring to your business? Quite a few employees think this way and might try to convince you that's a good idea.
So let's go through some of these options and see if that makes sense.
Let's start with productivity. If you were to double someone's pay, would they double their productivity? I suspect not, unless of course you're doubling their hours in which case fair enough. So I think we can conclude that you don't pay for productivity.
What about good performance? Well I would suggest that you pay a proper wage and expect good performance. You might give a bonus for great performance, but good performance is what you should be getting anyway.
What about the value they bring to your business let's explore this one for a moment with a thought experiment.
Just imagine you had a machine that printed money. And, go with me here for a moment let's just supposing this was somehow feasible and legal and no one else had one. Getting a little tired of turning the handle, you employ someone to turn the handle for you. Well after cranking out your millions for a few days this employee comes to you and says " look I'm making millions of dollars for this company, i think you should pay me half, after all, look at the value I'm adding to this business". Well hang on a minute who invented the machine to make this all possible? You, right? All the employees doing is following your instructions and turning the handle. I'm sure you could find someone else to turn the handle for not a lot of money. Now although this is an extreme example, do we agree that the value the employee creates is in the context of the business you created. You enabled them to create that value. You really need to look at their particular contribution to the value chain. I find that business owners really undervalue what they have created.
Alright, so so far it doesn't seem to be productivity, good performance or value generated in the business. So just what do you pay for?
Well I would suggest to you that employees are selling their services into a market, and that market determines their worth. The more skill they bring to the table, or the more responsibility they accept, and their relative availability in that market determines their earnings. Now it's not just one number. For any given job, there is a range. By all means they can negotiate within that range, but if they want to earn higher than the range, then they either need to apply for a different role within your company, or a different job with another company, because if your business pays too much for an employee, you risk becoming uncompetitive. Remember, your business is selling into a market and you probably have competitors, so your cost structure is important to competitiveness.
I see no reason why you shouldn't explain this to your employees who probably haven't thought about it. It helps them understand what they're worth and reduces the chance of ridiculous pay requests and subsequent bitterness when they come up against reality. So how do you find out where the market is?
Well the response to your job ads is one indicator. Few responses might mean the number is too low. Another source of information is often your industry association, and yet another source is recruitment agencies, some of whom produce salary and wage surveys. The government statistics will give you an indication of which way salaries and wages are moving. If you are locking in long term contracts, it is wise to put in a clause to move prices in accordance with this statistics.
Now I am all in favour of paying well to get the A-players, and charging well for a premium high quality service.
I have also said to a number of clients recently who have struggled to find employees that maybe the market has shifted upwards and they need to shift their expectations of what they should be paying along with their pricing to customers.
Some important points. Firstly, pay is a hygiene factor. This means that you must get it right for every employee otherwise trouble will ensue. You don't want a grumpy disengaged employee because they feel aggrieved that they're not being paid properly. They need to be satisfied that they are paid appropriately and the next time they talk about pay is in a years' time at the next pay review.
Secondly, beware the employee who doesn't ask for a pay review in a rising market. Just because they don't ask doesn't mean you shouldn't review their pay. Just hoping that they're happy with their pay he's asking for trouble. Often really good employees why do anything, but the camp disenchanted when you aren't forthcoming, and simply leave for better pay elsewhere.
Thirdly, as we've discussed, pay and performance and not connected, so don't think that your pay review should be at the same time as your performance review. Keep them separate.
Finally, employees need to know how they can get paid more. After all, who wouldn't want to be paid more. So there should be a clear path for them to expand their skills, or expand their responsibilities within your business and some idea of how much more they could get paid. Remember, you might be building a business, but employees are building a career. If you help them build their career and they help you build your business, then you have a match made in heaven.
As always, if you have any questions or want to solve a business problem, give me a call. That's what I do. My contact details are in the episode notes.
This is Mark Jackson.