Paying employees is always a contentious issue for companies. How much should good people make vs. their peers? Does it really pay to make the investment in exceptional employees that cost a lot more? After studying the issue, there is a huge benefit over time. Paying exceptional people a little more produces enormous productivity gains to the firm.
Take three hypothetical employees that were exceptional, acceptable and marginal. The top candidate was 20% more productive than the average and the bottom candidate was 20% less productive. The pay rate is $10 per hour and there is a 30% mark-up to $13 per hour.
Ten exceptional employees produce $15.60 of value per hour each. A middle 50 employees produce the mark-up value of $13 and the bottom 40 employees only produce $10 of value per hour. Under this scenario, $1,300 is paid out per hour to employees but only $1,206 per hour of value is received. For 8 hours in a day, that equates to $752 per day of value loss or $188,000 per year. Any company would be surprised at that large amount of loss per year. Over time, the disparity in talent actually causes a huge impact on the bottom line.
In the end, companies end up paying $9,490 per week to employees that are not truly earning their value. The total is $493,480 per year in over payment to employees. Whether it is a manufacturing over service firm, these figures are important to the bottom line.
Companies should think about their annual investment and what they wish to receive from those salary expenses. If they want to truly create outstanding performance, they must invest in outstanding people.