For many small business owners, the title of this post may seem counter intuitive. You think that in a capitalistic economy, shouldn’t you try to get the best employee for the least pay? The simple answer is really no. This does not work in the long run and it becomes a fool’s errand. Here is why:
- There are no deals. If you think you are getting an experienced person at a reduced price, there is a reason that that candidate is not working at their market rate. This does not mean that early in a person’s career you can’t find a gem, but later to retain that person, the company will have to pay market rate. If a small business can’t afford a person at their full rate, see if they can be hired part time.
- Churn is expensive. One of the most expensive things for a company is to constantly be replacing their staff. The cost can be as high as 25% of their compensation. Any churn rate higher than 33% can be disastrous for a business. One of the reasons people leave is because they can make more money somewhere else. Make sure that does not happen.
- Golden handcuffs are effective. When I worked at a computer consulting firm in the early 1990s, they always paid 15- 20% more than their competitors. Although it was a stressful place to be, people stayed and worked hard because it was tough to leave that kind of money. The extra pay kept them there.
- Great people cost money to get results. This is a fact of business. If a company wants to get great results from people, they will need to pay them well. While paying more does not always mean you get great people, it’s a good general rule to follow.
This may sound silly, but the difference to the company to pay people very well is inconsequential to a growing business. If there is a payroll of $1M in a $3M company, to pay well at $1.2M really will not make a difference if the business gets great results.