Sharing your financial data with employees can reduce pay squabbles.

Everyone wants to earn more money. That’s a given in any walk of life. So what do you tell your employees when they tell you that they need to make more or they’ll look for other employment?

With people who are not top performers, the answer is simple. You tell them to go ahead and look. In most cases, though, it will be the better employees who muster the courage to ask for a raise. They know their value and feel underpaid. Then your choice is to either cave in or risk losing a key employee.

Actually, there are some other choices that represent a middle ground between an employer’s need to keep pay scales in line with market realities, and a deserving employee’s genuine need for more moolah. Here are some win-win ways that employees can earn more money.

Establish a commission plan.Some large contracting firms have jobs with titles such as “vice president of business development” or “business development manager.” They are charged with going out and landing new jobs. Usually, they receive a base salary coupled with some cut of the profits on work they bring in. (Commissions better be paid on profit margins – otherwise you’ll end up with a bunch of work sold at cost or below.)

“Business development” initiatives don’t have to be limited to large companies or even to entire jobs. It’s possible for small contractors to devise incentive compensation for employees to enhance sales via upgrades and add-ons, change orders and anything else that brings in more company revenues and profits.

The beautiful thing about commission compensation is there’s no “we can’t afford it” excuse. It only gets paid if the employees bring in more than enough dollars to cover their cut. That involves nothing more than simple arithmetic.

Take on added responsibility.There is a business concept that every small business owner needs to take to heart. That is, work should be performed by the lowest ranking employee capable of handing it.

You don’t want craft workers or supervisors spending a bunch of their time processing routine paperwork that can be handled by a file clerk. On the other hand, you sure as heck don’t want the file clerk to be working with the tools or managing the people who do.

Unless, of course, the file clerk is capable of doing that harder job effectively. Some people have the talent and drive to grow beyond their present jobs. I recently met a distributor of industrial pipe, valves and fittings who bragged about the fact that all of his sales reps started out working in the warehouse or as truck drivers. This distributor believed in promoting from within and keyed on sharp people who worked for him, even in the most menial positions.

Promoting from within has severe drawbacks if you don’t hire people capable of growing out of their present jobs. Not everyone will. Watch out for the Peter Principle, whereby some people get promoted beyond their capabilities. But if you identify sharp people working beneath their abilities, it’s a great boost to employee morale and performance to know that they have room to grow in a company. Let them know that there’s opportunity available to earn more money by taking on more responsibility.

Share in savings.This is nothing more than the old suggestion-box notion of soliciting recommendations to save money and then sharing the savings with the employees who come up with the ideas. Just make sure that the savings can be measured in dollars and cents. Ideas that are not documentable are not worth paying for. In particular, create incentives for eliminating mistakes. Mistakes cost time and money to correct, and usually cost you future business.

Pay the person, not the job.Socialism doesn’t work. Pay individuals, not positions. The “going rate” for a craft worker is meaningless. A good one is worth much more, while others are barely worth keeping on your payroll. A merit pay system is harder to manage than one based on job titles and seniority, but it’s the only way to go.

Aren’t some of your craft workers more productive than others? Can’t some of them be counted on to do a better job than others? If so, they should be paid more.

The key here is to have a performance pay system in place that rewards the best employees. For example, if one driller finds out the driller on another one of your crews earns more, you have to be ready to answer why, if challenged. Then you need to be ready to explain to that person what needs to be done to receive a similar boost in pay.

Merit pay cannot be completely achieved in a union shop. However, most agreements will allow you to be selective in awarding overtime and various perks to your best employees. You also can devise incentive pay plans beyond what the agreement calls for.

What’s the cost of replacement?Your message to the person who requests a raise is: “How much do I rely on you?” or “What would it cost me to replace you with no loss of performance?” If the cost to replace that employee is more than the employee makes, the employee deserves a raise. If not, then the leverage is on your side.

Some employees contribute so much value to a company that they are virtually irreplaceable. This is not a healthy situation for a small business owner. But if you find yourself in it, better treat that person well.

Work should be performed by the lowest ranking employee capable of handing it. If you identify sharp people working beneath their abilities, it’s a great boost to employee morale and performance to know that they have room to grow in a company. Photo courtesy of the USGS.
Establish profit sharing. Instead of periodic pay increases, establish a profit-sharing plan in which base wages and salaries stay pretty much the same over time, but income fluctuates in line with company profits. In good years, your people make out like champs; in bad years, they take a bit of a bath. To be effective, a profit-sharing plan must award employees a reasonable percentage of company profit dollars. This creates an incentive for everyone to do their best to increase sales and profits.

Award educational bonus pay.Give people a raise for significant educational milestones, such as completing dealer training programs, earning a degree, passing accounting courses, and so on. Some companies that do this insist on the training being work-related; others figure that any education is a sign of self-improvement that will pay off in the long run.

Make sure there are opportunities for all. Sometimes employees are underpaid because a compensation plan just doesn’t fit right. For instance, incentive pay programs often don’t work for bookkeepers or other office staff whose performance only remotely impacts company sales and profits. You may have to create a different system for such employees.

Here are some other things to keep in mind regarding employee pay.

The employee shouldn’t have to ask. If an employee has to ask for a raise, there’s something wrong with your performance evaluation and personnel management systems. People ought to come up for regular review and know exactly what they need to do to earn more money.

Teamwork is as important as talent.The vast majority of employees are “pluggers,” i.e., people who do their jobs competently but without particular distinction. Once in a while, you come across a superstar who should be compensated accordingly. However, if the superstar turns out to be an insufferable primadonna who disrupts the morale of all the pluggers, it might be good to get rid of the superstar. You can succeed with a team of pluggers.

Open books reduce pay squabbles.Open-book management, whereby you share your financial data with employees, is a good way to forestall employee pay complaints. When they can see where all the money goes, it becomes a lot easier for them to understand that their pay doesn’t come out of an unlimited horn of plenty.

The smaller the firm, the more important it is for all employees to understand basic business economics. By gaining access to company books, they can clearly see that there isn’t a lot of extra money lying around.