Pay Your People More

Why paying your employees more can be worth it.

I recently attended a business-valuation workshop alongside a handful of decision-makers. The goal? Help attendees understand how an outsider would put a dollar figure on an existing business. Our exercise pitted one half the group against the other, faux potential buyers against pretend current owners.

Each side of the room came up with a price, then compared, sure we’d be close. Nope. The hypothetical buyers valued the company at a tenth of what the sellers did. Sellers weighed factors like sweat equity, company longevity and personal relationships highly, while buyers considered the capability of the executive team, staff satisfaction, equipment and assets. A customer base with a strong CEO connection was a liability; would those customers leave if the CEO sold the business?

This is a parallel to why some companies struggle to pay employees, particularly blue-collar workers, more.

Similar to a company valuation, when you consider your employee compensation, you’re likely to more heavily weigh your benefits, and to positively skew the experience of working at your company. Even great employers can overestimate the value of working at their company (wages, benefits, opportunities). 

From the worker’s perspective, time at your company is time to make money and learn skills, but also time away from loved ones, time spent enduring the less positive aspects of working for you.

Every company has a few reasons why working there isn’t so great. Think a so-so manager, no vacation time for the first six months, a petty coworker, unreliable hours, stress, ever-more-expensive health insurance, etc.

When we consider the need to attract new people to our industry – particularly young people – we have to know that they possess plenty of options to make low wages, and can easily find bosses who will sell them on soft benefits that can be uncertain (“Tons of people move up here!”). 

Calculate your average turnover rate for a given role, and factor it in to your wage offers. So, if it costs $5,000 to hire a replacement and you pay $15 per hour with an average one-year turnover in a year, then the annual wage you’re paying is $31,200 – but the total cost of that position to you, per year, is $36,200. If paying a higher wage could get a more loyal person, you could pay the same amount and avoid hiring headaches at the same time.

It all depends on how much it’s worth to you. Just don’t underestimate the true cost of paying the lowest wage possible.

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