Employees are not straw hats

If you’ve ever been in a position to hire people, ask yourself how many times you’ve heard one of the following phrases:

a)  Let’s see how much we can get him for.

b) She’s making $75K now, do you think she’ll settle for $65K?

c) Let’s give her $60K now, and we’ll move her up to $75K next year.

Employees are not straw hats being sold on the beaches of the Bahamas.  On the beaches in the Bahamas, you negotiate for the lowest dollar possible.  It’s part of the fun of buying in locations like that.  The seller says $5.00, you say $3.00, you settle on $4.00 and everyone is happy. 

Not so in the world of employee hiring.  Here’s the deal – pay people what they’re worth, REGARDLESS of what they were making somewhere else.  If an employee prospect was making $50K, and you know that person is underpaid by $20K, offer them $70K.  You heard me correctly – offer them $70K even though they may have joined you for $55K.  Does it sound absurd?  Here’s why you should do it.

1)  The new employee will feel important and appreciated.

2) The employee will see you as a fair employer right out of the gate, which buys you a lot of goodwill. 

3) Sooner or later, most employees figure out how much they are worth in the market, and if you’re grossly underpaying, they will either demand more money or quit. 

You might be saying at this point, “if I can get away with paying them less for 6 months or a year, why not?”  The answer is simple – it’s just not worth the price.  Let’s do some simple math.  Let’s use an example where you are underpaying someone by $20,000 ,  and after 6 months they demand a raise so you agree to an increase in their salary to $65,000.  $15,000 divided by 2 (half a year) is $7,500 in savings to the Company.  Here’s the cost of that $7,500:

– Little to no loyalty

– Little incentive to put in extra hours

– Little to no credibility in the eyes of the employee

– Higher turnover

In my experience, that normally adds up to a lot more than the savings you achieved by underpaying on the salary.

Finally, the reverse is true as well.  If you want to hire an employee that was overpaid, then you should offer that prospect what the market dictates, and no more, even if it’s less than he was previously making. 

So next time you feel the need to negotiate, book a trip to the Bahamas and send me a straw hat.

~ by lschwartz on September 27, 2007.

2 Responses to “Employees are not straw hats”

  1. Great point. For the most part I couldn’t agree more. Even using simple math the cost of an employee leaving and having to be replaced can be extremely high, both in dollars and in knowledge lost. In my experience another aspect employers typically fail to consider is the loss in MOMENTUM this creates in a company – longer time to market, lower quality, the time for replacements to re-learn all the market-specific lessons that the company had in fact paid their predecessor to acquire, and are now paying for all over again. Despite this, managers and executives are still willing to take the bet (even if they’re not concious that it is in fact, “a bet”) that they can save a little money short-term and get more for less. They state platitudes like “everyone is replaceable”, or “if they don’t like it they can leave” to avoid the more objective financial calculations. I’d love to see your thoughts on this.

  2. Nice view on the real value of human resources.

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