644: The "Industry Standard Compensation" Myth

What do we pay our new hires? How do we know what the compensation package needs to be? Well, I can tell you it doesn’t start by asking, what is industry standard! One of the questions we get most frequently right now is “What should we pay our new hire?” Now, the first thing I’ll say is if you haven’t listened to any of our podcasts or content on your hiring process, you need to start there first.  You need to make sure you have a Job Role, performance expectations, all the processes needed for their role documented, and have communicated the Mission/Vision and Values of your business. Great, we’ve got that out of the way…we’re ready to hire someone, how do we know what to pay them? Well, I’ve sat with multiple business owners in the past month who have asked the same thing. They always start with, “Well, what are other businesses paying their Project managers, or admins, or sales guys…whatever they’re hiring for.” Friends, let me stop right there and say…that is a dangerous game to play! And it sets you up to either under or over-compensate your employee from the get go. Let’s talk through that. If you start with industry-standard, instead of what your business is designed to pay that role, you will always be chasing the industry instead of what your business can afford. In two cases recently we moved past the industry standard conversation quickly and into what the business can afford. We walked through the numbers and what the role would allow us to grow our sales to or free someone else up to sell. It was like a lightbulb went off. To maintain the profitability they wanted, it was in black and white. One scenario the business actually could afford to pay significantly more than industry standard for the position they were hiring. They were able to go after their number 1 target and make an incredibly competitive offer. In the second scenario, they realized that they couldn’t afford to pay industry standard. The business was not ready to hire for the position yet. So they either had to find someone new who they could train up and pay a bit less than was typical, or build up some more cash reserves, improve their forecast from the sales side, and re-enter the hiring process in another 3-6 mos. Either way, they didn’t get themselves hamstrung from a cash flow perspective by offering MORE than the business can afford. And yet how many times does this happen? We don’t really know our numbers so we throw a random number up and decide that the business can do it. And then we look up 6 mos from the hire date and wonder what happened to our cash! That’s no way to set your business up for success. We need a job role. Need clear expectations. Need to know what will happen BEFORE we hire. And then once we have all that we can make an educated decision based on projections and adjust as necessary. Here’s the awesome thing about this. A lot of people want to say that it’s being too stingy or it pushes you to underpay people for maximum profitability. And yet what I’ve seen is the opposite. It actually allows you and frees you up to pay what the employee is worth to the business and takes the stress off of that relationship. You’re not coming up with a number out of the blue to where they can say, “Oh my boss won’t pay me more, because they don’t like me.” No! It frees you up to say, “Here’s what your role is worth to the business, and with your experience here is what we can pay you.” It takes the relational side out of it, which is necessary during the hiring process, and allows you to base compensation on value added to the business. Let me say that again, compensation must be based on value added to the business. Not how long the person has been in the industry or what a past employee made or even what the person wants to make. It has to be directly tied to what value they will add to the business and what they will free the business up to make or grow to in the near future. So, the next time you hire…leave out the “Industry standard compensation” myth. It will lead you down a road you don’t want to go down. And if you need tools to walk through this or an extra set of eyes, please reach out. This is part of the chaos that we wake up every morning to liberate you, the business owner, from. And we’d love to work through it with you. Thanks so much for listening today, have a great week!