I’m often asked for advice on what to offer new candidates, or on what size performance increase might be appropriate for an existing team member. I tend to respond quickly:
“Take what feels right and raise it at least 10%. Or if you can, find out what the person thinks he or she should make, and raise that number by at least 10%.”
In other words, overcompensate. Pay your people more than they think they’re worth.
What? This is crazy!
I take that response as a compliment. Since most companies are average (a nice word for “mediocre”), then it stands to reason that out-of-the-box advice has a good chance of creating above-average results.
Beware the “Accounting Mentality”
Too many leaders have been influenced by the “accounting mentality” that paying too much (whatever that means) results in too-high costs. Really? Stop for a second and think about the warped mind-set this creates – one that treats inventory as an asset and people as a cost. How twisted is that?
Every business owner knows that the exact opposite is true: inventory is one of your most vicious costs, and people are your greatest asset.
Still can’t let that “accounting mentality” go? Well, riddle me this: In 1965, the average CEO’s salary was 24 times the average worker in the company.
So what happened to keeping pay low in order to save?
Overcompensation in Action
We’re surrounded by great examples of successful overcompensation:
Check out Zazie, the San Francisco restaurant that provides full retirement and health care, as well as higher salaries than others in that industry have ever imagined. The result? On average, restaurants in that city make less than a 1/4th of Zazie’s profits.
Or look at Costco, who pays cashiers far higher salaries and benefits than arch-competitor Sam’s Club. And how’s that working out? Costco generates $21,805 in US operating profit per hourly employee, while Sam’s Club generates $11,615.
Or take Gravity Payments, whose CEO recently increased the company’s minimum pay rate to $70,000. He’s read studies that show the emotional cost of low pay, and he wants to be part of the solution. Gee, do you think this could position him to get the best performance from the best people?
Please don’t jump to the conclusion that you should copy any of these examples. Rather, look at these companies’ mind-sets, think about their innovative approaches, and reevaluate your own paradigm about compensation.
Money’s Not the Motivator
Now, here’s a key point in any conversation about compensation: money is not necessarily a prime motivator. In fact, as people earn more, money becomes a proportionally less important motivator.
It’s also a very short-longevity motivator: money has almost no staying power.
The most effective motivators come from showing (including through compensation) that
- You truly value a person
- They win when you win
- You have faith in them & in how they will affect company performance
- You’re willing to invest in their future
These messages last far longer than money.