How Much is an Employee Worth?

Sep 25, 2000

With all of the employment-related pressures that firms face today, it’s getting harder and harder to figure out what you really need to pay somebody to do a given job. There are so many ways to come up with a number for a new hire. And a whole new set of variables has to be considered for those who are already with the firm. Here are some thoughts on setting salaries today, in no particular order: New staff. I always start with what the potential employee is currently making. The way you get this information is that you simply ask for it. And the earlier in the process, the better. It gets harder to get this data if the candidate is too far along with interviewing, so I would suggest you get it before your first face-to-face meeting. The next thing I do is adjust that number up or down based on overtime policies. For example, if the employee currently gets straight-time overtime, and you don’t pay any overtime to exempt staff, I would find out how much overtime pay the employee got in each of the last few years and how he or she feels about the hours worked to earn it. Then I’d add some or all of this money to the base salary. The next thing I would do is adjust up or down for health insurance contributions and company automobiles. Once I have the adjusted number, I would multiply that by 1.1 for a local candidate and 1.15 (or more) for a candidate who would need to relocate for the job. This number (or higher) would most likely be the base salary offer we’d make if we thought we could afford it. Poor performers. I don’t believe in pay cuts, with a few rare exceptions. They are just too demotivating to the recipients. Generally speaking, the poor performer has to be reformed or run off. It’s one or the other. The worst thing you can do is give a raise to a poor performer. While past performance and contribution will never be something you can entirely disregard, recent performance is more important when it comes to setting salaries. But what if you have a poor performer in a critical slot where that person is the only one who does the job firm-wide, and you know that a mediocre capability is better than none at all? Don’t pay more, but start looking for a replacement. Great performers. You have to face the fact that top performers need to earn more than those who are just satisfactory or worse, mediocre. The best people will be the most sought after. They will have more options. Other firms will actively recruit them. Paying these people more than their peers will cause hard feelings with the peers. But what’s the alternative? Hold them back because you don’t want to upset the lowest productivity workers? That doesn’t make sense either. You cannot just take care of the high performer through your bonus program either, although Lord knows that’s what most firms try to do. Salary is always perceived as having a greater value than bonuses because the employee can count on their salary. Salary compression for existing staff. At some point, you will have to face this. The young people you’re bringing in from outside, whether they are right out of school or have worked for another firm, will earn more than some of the people who have been at the firm for years. There’s no easy solution to this problem either. If a currently overloaded staff wants help so they don’t have to work a steady diet of 60- and 70-hour weeks, it may be necessary to pay a premium to get someone in the door. What happens afterward is up to you. You can keep the gap in pay between two folks with similar credentials and capabilities, or you can accelerate the salary progress of the longer-term employee, if he or she deserves it. Overtime pay. Don’t like it myself, and I probably never will. The big beef with paid overtime for people who are legally exempt from the laws governing overtime payment is that it has the potential to turn your salaried people into blue-collar workers. The employee shares no risk whatsoever for the financial success of the project or the firm overall. Getting into that kind of a mindset is no way to create the future leaders of the firm! I would get everyone that I could legally pay that way onto a salaried compensation arrangement, even though paying overtime is tempting during the peak times of the year. Salary increases for new shareholders. A lot of firms finance stock purchases through year-end bonus payments. I don’t care for that. What happens if the firm loses money, and there’s no bonus? I would much rather sell smaller amounts of stock more frequently and not base ownership transition on being consistently profitable because experience has taught me that’s not usually the way it works out. It means financing the stock purchase and taking stock payments out of payroll. And one way firms can help the new shareholder is to take a look at his or her salary and juice it a little at the time of the stock offering. The increase does not need to cover the entire stock payment, but it ought to help out with those payments. And two or three years into them, it ought to cover the whole payment. Originally published 9/25/2000.

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