Guest blogger and trusted business associate, Bill Boyer is the President of Tidewater CEO, a consulting/coaching organization for small company CEO’s. He can be reached at bill@tidewaterceo.com or 757-233-2577.

Tidewater CEOEveryone knows that you get what you pay for.  Few companies operate that way. More ironically, few businesses follow the rule “the systems run the business, the people run the systems.” Without good systems, better people are required. Because many smaller businesses have not yet developed good systems, they should compensate for that by hiring a strong staff.  Yet, it is these same operators that do not want to pay the market rate and definitely not a premium rate.  So they buy the help at discount pricing.

There are many reasons for this.  One is that CEOs have occasionally gotten a bargain on an excellent employee; because of these occasional successes, they use a “bargain basement” pay strategy. This intermittent reinforcement has led them to believe that it is possible to get good people cheap. Conversely, many have had the negative experience of realizing that they are giving premium pay to employees who don’t measure up to expectations, so they fear that they may waste money by paying people more.

This process starts at recruitment. Good people can not be consistently recruited for low wages.

Real-life example

Sally prided herself on her bargain hunting ability. This spilled over into her employment searches. When Sally needed an administrator, she thought to herself, “This is an easy job.  It really isn’t much more than a glorified clerk.” Sally figured she could get a good person for $8/hour. Sally did find a “qualified” person for $8/hour. Training the new employee took a bit longer than Sally figured, but hey, she was filling a $12/hour position for $8/hour. Over time, the administrator became an important resource for Sally. However, the administrator’s attendance became spotty.  Sally was frustrated that whenever she needed the administrator the most was when she missed work.  Sally felt like firing her administrator, but how could she find someone else for only $8/hour?  Therefore she tolerated the spotty attendance. Eventually, the administrator took a job for $12/hour at another firm. Sally was forced to raise the pay of the position and retrain.

You may feel like you are getting a bargain when you:

  • Pay less than the market rate for the position
  • Pay a good person less than they are worth to the company
  • Slot moderately qualified people into moderately underpaid positions.

And, for the short term, you are getting a bargain.  But there are several long-term downsides:

  • The company needs to have great training because it is starting with poorer caliber people. Training takes time and effort – do you have the resources necessary to train and re-train?
  • If the organization does not pay market rate for good people, it will often get bad ones. When an organization is filled with mediocre performers, good performers will not want to work there. Winners attract winners.
  • A tremendous amount of energy will be spent training mediocre people and turning them into good performers only to have them leave for more money. The company will be relegated to being a “farm team” for other companies.
  • Here is the most important point: the CEO’s time is the most valuable time in the organization. His time is being wasted on “trying to make a silk purse out of a sow’s ear.” It should not be tolerated. A business can only move at the speed of the CEO. This is keeping the company from achieving its potential.

Solution

Rate the existing staff.  Prepare evaluations for each, identifying their strengths and weaknesses; give them a chance to improve within a specified time.  The company may have poor performers who will never improve.  If so, start the upgrade process. The poor performers will have to be replaced with better ones. Pay what is needed to get the talent that is required.

You may also have some “jewels in the rough” who are turning into good employees.  You may want to increase job responsibilities or increase pay to ensure that you don’t lose their services.

Don’t pay the poor performers more, in hopes that they will improve.  They are already being paid enough to not quit, so don’t waste the money on them.  The company will most likely be able to reduce headcount.  One terrific employee can do the work of two to three poor ones.  You must get the best employee for your money, not the cheapest.

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