How You Know How Much to Pay Employees

Finding market-rate salaries can be difficult, especially as pay rates increase rapidly in entry-level jobs. We know that you’ll make more money if you jump companies, which makes no logical sense–your current company should pay up. But they don’t increase salaries enough for current employees, although they will pay for new hires. Why?

Well, many reasons, one of which is it’s hard to change jobs, so they know it has to really suck for you to start looking. And two, the market rates fluctuate, so they aren’t sure what it is until they look for new hires.

Today I stumbled upon this post on LinkedIn, demonstrating a sincere lack of understanding about how businesses work.


First of all, not everyone has the same expenses as everyone else. Someone may have chosen to attend community college and a local state school with no student debt. Someone else decided to attend a ritzy school with $120,000 in student loans. Someone may live with roommates or at home, while someone else bought a house, they can’t afford.

For those who are fans of working from home, one employee may live in a rural midwest while another lives in a tiny apartment in Manhattan that costs three times as much as the midwest mansion.

The company isn’t required to change salaries based on other people’s life choices. And it’s not exploitation, either.

People take jobs for one reason: It makes them better off.

Now, what better off looks for people vary. A better work-life balance at a lower salary may be better for someone highly paid. Someone drowning financially may take a shift opposite their spouse to save on daycare costs. But no one takes a job that makes them worse off. You get no job if you prohibit people from offering jobs that don’t pay rates high enough to afford Netflix and a mortgage (I rent, thank you very much). Does that make anyone better off? No.

No business can survive if its employees don’t produce a good return on their investment. If I run a widget factory and I can sell these widgets for $10 each, I can’t afford to pay you $15 an hour to make one widget. It doesn’t matter how high the rent is in your town or how many student loans you have. The business just won’t run. But, if I offer $7.25 an hour (the amount of time it takes you to make one widget), I just may be able to afford to hire you. (Overhead, materials, marketing, salespeople, etc., all have to come from the money I receive from selling widgets.). Chances are I can’t afford even that.

So what do I do? Kelly Tucker would have me shut down my business. That isn’t much help to anyone. Instead, I’d look for people who could make three or four widgets in one hour. Then it’s possible that $15 an hour would be a fair wage. The person who can only make one? It’s not the business owner’s responsibility to give them the skills necessary to get a job that pays enough to cover a mortgage.

The business is responsible to

  1. Pay the agreed-upon rate, including any necessary overtime
  2. Comply with all state, federal, and local employment laws

It would be great if they were also nice, and morally, they have an obligation to do so. But there’s no legal obligation to do so.

Dave Lorenzo sums it up:

The goal of a business is to deliver a profit for its shareholders.

Period. Full stop.

If the business pays a competitive wage to its employees – meaning if it can attract talented, qualified people to fill open positions, the business leaders are fulfilling their obligations.

Paying more than the rest of the firms in the market can create a competitive advantage. It can enable the hiring of better talent. It can make the company an employer of preference. But that is a STRATEGIC decision the leadership of the business should consider.

I agree. It would be nice if businesses just wanted to throw money at me so I could buy a house, but it’s my responsibility to develop skills that give me the income I need. A business is not obligated to pay me more than the market rate. (I’ll happily accept the above market rate, but a company has no legal or moral obligation to do so.)


Image by RAEng_Publications from Pixabay

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4 thoughts on “How You Know How Much to Pay Employees

  1. I generally agree; however, I think the government, and by extension the voting public, has a place in determining that it’s not good public policy to allow business models that rely on wages so low that the employees all or almost all of the employees have to be subsidized by the government.

    1. I agree. Some of the most profitable companies in America have employees working full time — some much more than full-time, up to 60 hours per week — who still don’t make a “living wage,” and actually qualify for taxpayer-funded public assistance. It should not be an acceptable business plan in the United States of America to pay employees such low wages that the taxpayers have to pay the rest, all while paying executives sky-high compensation, paying shareholders handsome dividends, and making the company owners among the richest people in the World.

  2. Suzanne,

    With regard to whose job it is to develop someone’s skills, I don’t think it’s as cut and dried as you presented — who pays for training is still a market function. For example, in the US, there used to be so many applicants for an airline flying job that the airlines would charge application fees to cut down on the number of applications. Over the years, the requirements to become an airline pilot have increased substantially, to the point where it is too costly for most people to fund the training all on their own.

    Consequently, with the pilot shortage, the airlines are faced with either cutting routes or paying to train their pilots. We’re seeing a little bit of both now. United’s CEO has publicly said that they have 100 planes they want to fly that they don’t have pilots for.

  3. This article post brought up many issues. The main issue, I agreed the most with is how the company determines what is needed to offer a pay scale on an hourly rate while making enough money to pay the other costs to keep the business running. I am not even going to address the separate need to create a profit line for shareholders because that is just part of doing business. If the company has made it clear in the required minimum job performance that to achieve a certain pay rate, one has to achieve a certain job performance, there should be no issue for any applicant looking for a position with the company. The only times, I have seen problems with this required minimum efficiency is when the team of coworkers has a member who doesn’t do their expected fair share of the work and the others have to fill in the gap and management doesn’t seem to notice or ignore the problem. (I am not talking about an unexpected problem but a team member who does the least amount of work all the time–we have all met and worked with this individual)
    So as the article states if looking for a job that has a pay scale that meets your required cost of living expenses, remember that the salary offered does have job requirements you must maintain before you start complaining about your pay.

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