Leaner and Meaner (Part 3): Investing in Employees

Employees are free agents. As a business owner you wouldn’t sell your customers at a loss because in past years you made a profit. Neither should we expect employees to get better at their jobs without expecting compensation commensurate with their current market value.

In the wildly popular “Downton Abbey” series the kitchen maid, Daisy, is bucking for a raise and promotion. She says “I know a lot of things I didn’t know when I started here.” Mrs. Patmore, the cook, tells Daisy “Yes, but they are all things I taught you.” Daisy replies, “Well yeah, but I learned ‘em!”

Gratitude is a lousy motivator. Expecting loyalty from an employee simply because you’ve taught them skills is a surefire path to turnover. In a competitive economy where you are trying to accomplish more with less (see last week’s Leaner and Meaner column) each individual on your team has to be better. The days of making up for mediocre talent by adding bodies is over.

Over 70% of the US Gross Domestic Product is from services. Services are performed by people. If you are going to increase profits faster than you increase revenues in a service business, you have to do it by having more productive employees. That means investing in them, and then keeping that investment longer for a better return.

Investing means more than wages, benefits and on-the-job training. Job benefits like support for formal education, flexible hours and training that increases job market value means the most to the best employees. Unfortunately, those are the productive workers to whom we often offer the least flexibility. In a company of mediocre workers, the ones who rise to the top are frequently the most shortchanged when it comes to additional investment.

Small business owners tend to myopia. They look at their companies as self-contained universes. If your expectation is that an employee should be gratified because he or she is compensated better than other people in your organization, or others within their department, it is time to understand that such measures are no longer valid. Employees can check the internet for comparative wages. They discuss salaries with each other, with friends and with former co-workers through social media. They are acutely aware of competitive market rates for their abilities, even if you aren’t.

Too many small business owners avoid such additional “sunk costs” for fear that they are training new competitors, or that their highest skilled employees will be pirated away by bigger companies. That is clearly a danger, but in a free market lack of investment merely dooms you to produce with assets that are less effective and less efficient than those of your competitor. That is not the road to “leaner and meaner.”

For decades, the proponents of human resource accounting have argued that businesses should capitalize the hiring and training expense of a new employee. If we amortized those costs over time, and had to write them off against profits if an employee left before they were fully recouped, we would have a very different attitude towards retention.

Increasing your competitiveness is no longer a choice; it is a necessity. Treating employees like mushrooms, keeping them in the dark about the world outside and teaching them only what they need to know for your purposes, reduces your competitiveness and increases replacement costs. The trick to creating a tough, winning organization is to build a team of talented high performers who enjoy compensation and benefits that will stand up against any other opportunity.

Small business owners cringe when I say that. They say “We can’t pay what the big guys pay!” Even more often I hear “How can I pay top wages when I don’t even make top wages?” The answer to both questions is the same, and we will delve deeper into them next week.

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