May 19, 2015
by Bob Meyer, Editor of BarterNews
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Don't Set Your Employees Up For
By Doug and Polly White of
The worst thing that an employer can do to an employee is to pay
him or her significantly more than a free-market wage. What? The
worst thing you can do is to pay someone too much? We can see
people's hands going up volunteering to receive that type of harsh
treatment. But, the results are often devastating for the employee.
We'll define a free-market wage as the amount of money that the
employee could reasonably expect to earn if he or she lost his or
her current job and had to find work. It is what the free market
would pay a person with the education, experience and skill set of
the employee in question.
We are talking about situations
where employees are paid 50% or more than they could get elsewhere.
If you think that doesn't happen, guess again. We're aware of a
company that has to pay low-skilled employees working on a
government job $12.50 per hour, while their other employees, doing
exactly the same work for private sector customers, are paid $8.00
per hour. The reason? The government requires that the workers on
its jobs be paid on a union wage scale. If the workers making $12.50
per hour were to lose these jobs, could they find jobs paying as
much? Not likely. They are making 56% more than the free-market
When an employee is significantly overpaid, several
things happen. In most cases, the employee does not recognize that
they are overpaid. It's human nature. Most of us believe that we are
worth more than we are currently being paid. At most, we think that
we are paid fairly. It is a very unusual person who recognizes that
his or her compensation is well above what he or she could earn
elsewhere and adjusts his or her lifestyle to compensate.
The second thing that happens is that the overcompensated employee,
not recognizing the precariousness of his or her situation, builds a
lifestyle that cannot be sustained by less than their current
income. For most, even if they know they can't replace their income,
they behave as though they can. People stretch to buy the biggest
house for which the bank will approve a loan. They buy new cars with
debt and leverage themselves to the hilt. Spending on "extras" chews
up cash, savings are minimal. Often it takes the current level of
income just to service the debt.
Then, the unthinkable
happens. The goose that laid the golden eggs is gone. It could be a
plant closing, a layoff or perhaps an employer who finally realized
he or she could replace the overpaid employee at a substantial
savings to the business. For example, a company that operated call
centers wanted to be on Fortune magazine's list of best places to
work in America. To achieve this, they offered above-market-rate
compensation, extremely generous benefits, three to five weeks of
vacation and numerous other perquisites such as fun days.
The company made Fortune's list. Then, the economy went south and
things got tight. A bright, young analyst figured out that the
company could save millions by outsourcing its expensive call center
operations? The party was over. Paying significantly above market
rates to employees who cannot justify the premium through increased
output is not only irresponsible; it's an abrogation of the
company's fiduciary responsibility to its shareholders.
people who find themselves out of work will try to replace the
income they have just lost. They believe they can because they think
they are worth what they were making. Refusal to accept lower paying
jobs lengthens unemployment and makes matters worse. They try to
hang on to the lifestyle they built, not realizing that they will
never again attain their former level of income. We've seen cars
repossessed and foreclosures on homes. Marriages have broken up
under the stress. In one particularly sad case, a person ended up
sleeping in his car.
Of course, blue-collar workers are not
the only ones subject to this phenomenon. Many white-collar workers
and elite athletes have met the same fate, having worked very hard
for years to make it to the pinnacle of their sport? Too many elite
athletes proceed to build a lifestyle that requires their current
level of income to sustain. The minimum salary of an NFL football
player is currently about $375,000 per year.
the average number of seasons that a player spends in the NFL is
three and one-half and most have no prospect of making that kind of
money once their playing days come to an end. Too often, when the
ride is over for these elite athletes, their worlds come crashing
down and they find themselves destitute.
The shortened list
of former star athletes who met with financial ruin includes
household names such as Mike Tyson, Scottie Pippen, Lawrence Taylor,
Dorothy Hamill, Rollie Fingers, Bjorn Borg and Johnny Unitas.
It may sound odd, but in our years of experience, we have found that
the most unfair thing an employer can do is to pay an employee
significantly more than a free-market wage. Doing so sets the
employee up for financial ruin when the gravy train comes to an end.
We've seen it time and time again.
(Doug and Polly White
are principals at Whitestone Partners, a management-consulting firm
that helps small businesses build the infrastructure they need to
grow profitably. They are also co-authors of Let Go to GROW,
which explains how entrepreneurs can avoid the most common pitfalls
when growing a business. It is available at
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