How Much Should You Pay Your Employees?

Every small business owner who employees people outside of their own family has been faced with the same issue: how much do you pay your employees? Often times employees assume that they should be paid what they "are worth." No doubt there is some truth in this phrase, but how can a small business owner determine what employees are worth?

Say you have an employee that is a hard worker and you determine that their contributions are grossing the company $100,000 per year in revenue. Assuming that you are in a high-margin industry and you have a 50% margin, this employee may erroneously think they are worth $50,000 per year, and hence they should make this much money.

In this illustration it is not hard to see why the employee is wrong - if you were to pay employees the exact amount that they are increasing your investment you will never have a successful business - you will always be operating at break-even. And this is a best-case scenario - worse case scenario some unforeseen event will come along and make you unprofitable.

A more realistic approach is to pay employees what it would cost to replace them. This includes taking into account what they do, their education, their efficiency and their productivity. By this standard, the same employee mentioned before may cost $35,000 per year to replace with somebody just as good - hence they should make $35,000.

This is an important principle that many small business owners don't understand. It involves doing some work (finding out what competitors are paying, knowing what kind of talent is out there and having a good relationship with your employees so you can understand when they are thinking about making a move). In the long run the time you will spend researching this issue will undoubtedly pay off in the form of happier employees and a healthy bottom-line.

Article Source: http://www.bizpong.com

Preston Wily operates an prestonwily.com">internet retail blog as is the VP of Business Development for a retailer of computer cables and accessories.

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