What is an Employee Worth?

Stephen D. Kirkland CPA, CMC, CFC, CFF
September 9, 2013 — 2,144 views  
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It is well established that the most difficult part of running a business is attracting and retaining the best available workers.  This is also one of the most important aspects of running a successful business.  In fact, one business consultant has said that recruiting and keeping good employees should ultimately be the only priority for a business owner.

Although unemployment and under-employment rates are high, the market for reliable, talented, devoted employees is still tight.  Competition for these top performers has been referred to as a “talent war.”

Consequently, some pay levels have moved higher in recent years, and you may be reluctant to match what the market is paying.  But if you pay too little, you risk losing a good employee, and losing all that goes with him or her, including relationships and company knowledge.  In addition, recruiting and training a replacement will be expensive, especially if you have to pay a recruiting agency, relocation costs and a signing bonus to replace unvested benefits your new employee is leaving behind at the former employer.

So how much should you pay?

Salary surveys and databases are available to show compensation levels paid by other in the same industry for similar positions, and that may be a good place to start.  This market-based information is known as comparability data and the process of comparing one employee to such market data is known as benchmarking.  But an employee might handle multiple tasks, which can make it difficult to find comparability data and put specific numbers on that person’s value.  In other words, finding comparability data is not the end of the process, instead it is the beginning of the hardest part.  Since every employee is unique, many factors must be considered in determining whether a specific person is worth more or less than what the comparability data shows.  One helpful step might be to ask the employee to complete an evaluation on himself or herself, listing recent accomplishments and short-term goals.  Then prepare your own lists of the employee’s strengths and weaknesses.  Review their job description and determine whether their actual duties are the same as what is on the written job description.  This helps make benchmarking more reliable.

Remember to focus on output (i.e. results) more than input (i.e. hours worked, experience, education).  Results are what you are paying for.  Carefully consider intangibles such as relationships with other employees, regulators, customers, and referral sources.  These relationships, along with loyalty, good attitude and dependability, are hard to measure and value.  Ask yourself: what would I lose if this employee walked out the door and joined a competitor?  What costs would I incur to get a replacement?

Then ask yourself: what am I providing to this employee in addition to cash compensation?  A pleasant work environment?  Advancement opportunities?  Flexible work schedule?  Health insurance?  Assistance with child care?  Paid vacation time (and flexibility to use that time)?  These are highly-valued benefits and should be considered to be part of the employee’s compensation package.  In other words, if these benefits are provided, they could significantly reduce the cash compensation required to keep and motivate an employee.  

This process should help you decide whether your employee should be paid more or less than the amounts shown in the comparability data.

Remember also that the least expensive reward is the one that is most appreciated – simple recognition.  Hand-written thank you notes are powerful because they are so rare in this electronic age.  Another powerful reward is a spot bonus.  This is a one-time, unexpected cash bonus used to recognize a special accomplishment or extra effort.

Regardless of how valuable an employee may be, be cautious about giving a large pay increase when times are good since higher base salaries might force you to lay people off when business slows down.  Try giving cash bonuses instead, so base wages don’t have to be cut so much when business drops off.

Stephen D. Kirkland CPA, CMC, CFC, CFF

Atlantic Executive Consulting Group, LLC

Stephen is a compensation and tax consultant. For more information on determining and paying reasonable compensation amounts, see www.ReasonableComp.biz.