Knowing how much you should pay the people who work for you in your business, for your personal brand, or for your lifestyle brand can be challenging. It’s often very easy to check the market rate and see how much other companies are paying, but whether you should pay this amount depends on the idiosyncrasies of your particular firm and what you’re trying to achieve.
In this guide, we run through some of the issues surrounding this topic so you can better figure out how much you should pay people.
Think about how much it would cost to replace an employee
One exercise is to consider how much it would cost to replace an employee. Just focusing on what the employee does at the company isn’t enough. You need to think about how much it would be to attract a similar level of talent.
For example, let’s say you have an employee right now who is your head of marketing. This person brings in $200,000 a year, and you pay them $100,000 a year. They’re good at their job and they generate twice what they’re worth. You think you may be able to replace them with somebody who only needs $80,000 to stay at your company.
It seems like you’re saving $20,000, but actually finding that person and getting them to stick with you long-term could cost you over $100,000 in upfront expenses. That’s not to mention the risks that you face of that new person also wanting to leave because you’re not paying them a high enough rate.
Think about the mathematics of pay
At the same time, you also want to err on the side of caution. Many businesses think that they can afford high salaries when in reality they can’t. When you make a new hire, you generally need them to generate around three times their annual salary in revenue for the firm. You need:
one time their salary to cover their baseline salary and taxes
one time their salary to cover overhead software and operational tools
one time their salary to contribute directly to company profits and margins
You can get away with less than this, but the cost of hiring the employee must be low. In these situations, you must be in a low-margin industry, otherwise it may be better just to do the work yourself.
If you’re not sure how much to pay a senior member of staff, go to a consultancy like Guerdon Associates. They can provide more guidance on what a potential hire is likely worth based on your specific business circumstances.
Photo by Tima Miroshnichenko
Total compensation ought to be higher than base salary
Finally, if you’re running a small business, you’ll want to set up a situation where total compensation is higher than employees’ base salaries. Base salaries are great in large firms where people are on promotion tracks or have pension schemes. If you’re in a startup or a lifestyle business, then people need to be paid based on the performance that they achieve. This works both for you and for them, as they’re able to earn more and you’re able to generate more revenue.
Knowing how much you should pay the people who work for you in your business, for your personal brand, or for your lifestyle brand can be challenging. It’s often very easy to check the market rate and see how much other companies are paying, but whether you should pay this amount depends on the idiosyncrasies of your particular firm and what you’re trying to achieve.
In this guide, we run through some of the issues surrounding this topic so you can better figure out how much you should pay people.
Think about how much it would cost to replace an employee
One exercise is to consider how much it would cost to replace an employee. Just focusing on what the employee does at the company isn’t enough. You need to think about how much it would be to attract a similar level of talent.
For example, let’s say you have an employee right now who is your head of marketing. This person brings in $200,000 a year, and you pay them $100,000 a year. They’re good at their job and they generate twice what they’re worth. You think you may be able to replace them with somebody who only needs $80,000 to stay at your company.
It seems like you’re saving $20,000, but actually finding that person and getting them to stick with you long-term could cost you over $100,000 in upfront expenses. That’s not to mention the risks that you face of that new person also wanting to leave because you’re not paying them a high enough rate.
Think about the mathematics of pay
At the same time, you also want to err on the side of caution. Many businesses think that they can afford high salaries when in reality they can’t. When you make a new hire, you generally need them to generate around three times their annual salary in revenue for the firm. You need:
You can get away with less than this, but the cost of hiring the employee must be low. In these situations, you must be in a low-margin industry, otherwise it may be better just to do the work yourself.
If you’re not sure how much to pay a senior member of staff, go to a consultancy like Guerdon Associates. They can provide more guidance on what a potential hire is likely worth based on your specific business circumstances.
Total compensation ought to be higher than base salary
Finally, if you’re running a small business, you’ll want to set up a situation where total compensation is higher than employees’ base salaries. Base salaries are great in large firms where people are on promotion tracks or have pension schemes. If you’re in a startup or a lifestyle business, then people need to be paid based on the performance that they achieve. This works both for you and for them, as they’re able to earn more and you’re able to generate more revenue.
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