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I’m A CEO—Here’s How I Decide Whether To Give You A Raise Or Lay You Off

This exec reveals the arithmetic companies typically use to assess employees' value.

I’m A CEO--Here’s How I Decide Whether To Give You A Raise Or Lay You Off

[Image: Laurent De La Hyre ("Allegory of Arithmetic"), Ad Meskens via Wikimedia Commons]

Employee compensation can be an emotional subject, especially if you’re the employee. It is often daintily tiptoed around in interviews and loudly complained about in bars. Personally, I’m a firm believer that compensation is a reflection of an employee’s value to a company. As value goes up, so does pay.

When I express these opinions, however, I often get disgruntled rebuttals like, "Yeah, right. Corporations have no concept of loyalty"; "Layoffs are completely arbitrary—it doesn’t matter what you’re worth"; and, "The only way to get a raise is to change jobs!"

Since these complaints are made to me—the CEO of a company that clearly isn’t so callous—it’s obvious that these stereotypes cannot be universal. Putting aside this irony, though, even if every company in the world were as ruthless and coldblooded as some believe, value and compensation would still be inextricably connected. Let’s take a look at why this is the case and how you can increase your value as an employee to get paid what you deserve.

What Happens Behind Closed Doors

Let’s be a fly on the wall in that dim, coffin-shaped room where lanky, black-suited business misers drum their spindly fingers together and cackle over that most evil of subjects: layoffs.

When they discuss the customer support floor, they decide they need to lay off one person, and gradually narrow the options down to two employees:

Option 1: "Bill" is an old-and-true company standby. He’s worked at the company for 20 years and has been completely faithful to his job expectations. He clocks in and out on time and delivers his customer support perfectly on script. As a result, he’s accumulated a number of raises over the years and now makes $20 an hour.

Option 2: "Shelly" has only worked in customer support for five years but has obtained advanced technical certifications, has an excellent interpersonal manner, and routinely turns upset customers into loyal patrons. Clients who get support from her are 30% more likely to purchase additional services and to refer friends.

She talks off script a fair amount but keeps track of what she says and how customers react. As a result, she has submitted many helpful modifications to the basic IT script, resulting in a 10% increase in customer satisfaction for the whole floor. Due to her high performance, Shelly also makes $20 per hour.

Which one gets the boot? It’s Bill without question.

The company is actually losing money on Bill. If they fired him, a new employee would work for only $12/hour and could read the script just as skillfully as Bill does within two weeks.

If Shelly were fired, however, the company would lose out on a major source of sales, referrals, customer satisfaction, and an internal system for improving the whole department—they can’t afford to lose her!

Related: 7 Tips To Kickstart Your Job Search After A Layoff

Value Is Not The Same Thing As Years On The Job

But what about faithful old Bill? It would be so mean to fire him! Bill’s problem is that he hasn’t really done anything to justify his increased wages. Small raises have accumulated on his paycheck like moss on an old river rock, but his real value is still around $12 an hour.

However, since Bill has been working at the company for so many years, he probably "feels" like he’s worth $20 an hour. Never mind the fact that he couldn’t get paid $20 an hour at a different company, he’s "put in his time," so he’s worth $20 an hour, right?

Now, I’m not trying to understate the value of experience and wisdom. Good employees learn and grow over time, so they provide more value for their employer. As a reward, they get raises. The problem is, those raises are often based on meeting minimum standards for specified periods of time—not the value an employee brings to the table. As a result, when push comes to shove and a company needs to actually evaluate the worth of an employee, "years on the job" means far less to the business than added value.

Related: How To Ask For A Raise

Businesses Pay For Value, And Employees Are Their Assets

Many employees are confused about what their salaries pay for. When people first enter the workforce as teenagers, they usually start with an hourly wage. The equation is simple: The more you work, the more money you get. Unfortunately, after a couple of years, many people begin to translate time into money and begin to think, "I’ve put in a lot of time at this job, so it stands to reason that I should be making a lot of money! I need a raise!"

Allow me to burst that bubble. Value isn’t a function of time. There are 24 hours in a day whether a company pays for them or not—it’s what you do with those hours that counts. Even for hourly employees, businesses aren’t paying for time—they’re paying for value. To put it simply, an employee is a company asset, and compensation is an investment in that asset.

Let me explain what I mean: If I were to invest $5,000 in a new asset for my business—say an online marketing account—you might think that I would have to make $5,000 in sales to justify the expense. Unfortunately, it doesn’t quite work that way. I won’t get too deep into the math of contribution margin, but in short, since my business expenses aren’t just limited to what I spend on marketing, it turns out that the account would have to make me at least three times my investment ($15,000) just to break even.

If the asset started producing four or five times more money than I put into it, then it would really be profitable. In fact, I’d be willing to invest more if I knew my payoff would be that good.

The same goes for employees: If I’m going to invest in people, I need to know that having them around will make my company at least three times what I’m paying them. The more revenue an employee drives for my business, the greater their value and the more I’m happy to pay to have them as an asset. An employee who produces less value, however, loses me money and—unless they can become more productive—I can’t afford to keep them in the long run.

Related: The 10 Highest-Paying Finance Companies In America

How To Increase Your Value

Now, I think we’ve looked at things like a ruthless businessman for long enough to show why companies care about the value their employees bring to the table.

In most real businesses with real, warm-hearted people (like I try to be), the same principles are still at play, but the focus is more on encouraging employees to become more valuable than on eliminating dead weight. In general, this encouragement comes in the form of salary. The more value an employee brings to the table, the more they deserve to be paid. The question then becomes, how do employees increase their value?

There are three basic steps:

  1. Ensure that you’re meeting the basic expectations of your job.
  2. Identify areas where you can add more value.
  3. Create and execute a plan to exceed expectations.

Step 1: Meet expectations. Before you start trying to expand your horizons, it’s a good idea to make sure that you’re at least fulfilling the minimum requirements of your role.

Of course, it can sometimes be hard to figure out what those requirements are. A recent Gallup poll revealed that up to half of employees don’t really understand what is expected of them at work. Many companies have very little in the way of formal job descriptions. Others have long lists of tasks and expectations around hiring time, but when you start the job you find that half the stuff on the list you never do and half the stuff you do isn’t on the list.

So if you’re not sure what your job expectations really are, the easiest way to get that question answered is to talk to your manager. Havea discussion about what workplace success looks like. You might even ask how your position adds value to the company. This gives you a target for increasing your value later on.

If, in this discussion, you discover work expectations that you weren’t aware of or that you haven’t been meeting, your first priority should be to start meeting those expectations. You may also find that, as Gallup’s poll also suggests, some managers are just as confused about your role as you are. If this describes your supervisors, then a sit-down conversation is especially important. Defining together what your core responsibilities are will help them to know when you are exceeding expectations.

[Related: 5 Ways To Get The Most Out Of Your Annual Performance Review]

Step 2: Find areas in which to excel. As part of your conversation, you should also determine a list of projects that could add extra value to the company that fall within the scope of your job.

It’s important to choose these projects in conjunction with your manager because you need to be sure that when you go above and beyond, it’s in areas that your company finds important. What’s more, you want your extra efforts to be recognized for what they are.

It’s helpful at this stage to come up with a way to document your performance. Remember Shelly—how she increased customer satisfaction by 10% and got 30% more referrals than average? These numbers make her value pretty undeniable, but they wouldn’t exist if she or her managers weren’t keeping track of them.

If you work in an area like sales, it’s pretty easy to document your performance with hard figures, but for many other jobs performance is less easy to quantify. Documentation is still important in these cases, but it may look a little different. For example, this is a scorecard my marketing director and I use to measure his performance each month (shared with his permission):

The first column contains a list of his basic job expectations. If he meets all of these he’s producing enough value to justify his base salary. The other two columns contain things that he can do to go above and beyond his normal duties to provide added value to the company.

This is a very simple documentation system, but it’s surprisingly effective. When it comes time for me to hand out bonuses and raises, I don’t have to wonder whether he’s earned it or not—I just look at the scorecard. If he’s consistently performing above expectations, then he’s adding extra value and he deserves to be rewarded.

Step 3: Make a plan and execute it. Finally, you need to put everything you’ve learned into action. If your goal is to increase your compensation at work, you can start by deciding how much more you would like to be making.

Take your current job expectations and salary as the baseline for what you’re worth to the company. Then realize that for every dollar that you hope to get in increased pay, you need to bring in three to five dollars to the business for your raise to make sense. Pick from your "above and beyond" list some projects that would add this kind of value to the company. Make a plan to complete these goals in addition to your regular tasks and present the plan to your manager.

Trust me, this will go over a lot better than the old, "I’m getting married so I need a raise" conversation. Your manager may not agree with every detail of your plan, but you will definitely come off as a motivated employee who really gets it. And even if your managers don’t buy in right away, it will be a great opportunity to discuss their priorities again and work together to come up with a plan that accomplishes things that really matter.

Don’t skip this important conversation. I’d hate to get a comment on this article saying, "I wasted six months doing what you said only to find out that nobody cared about my contribution."

If you haven’t figured out by now, communication with your superiors is going to be a critical part of this whole process. Unfortunately, business plans are rarely static and you may have to chase a moving target, but if you’re willing to be flexible, you should be able to keep moving forward toward your goals.

Related: 9 Work Habits That Could Be Killing Your Chances For A Promotion

Reaching Your Goals

Now, I know you’re probably thinking, "This all sounds great, Jacob, but it also sounds a little too idealistic. It would never work at my business." Maybe not. I can’t predict every circumstance, and there’s a chance that yours is an exception. But isn’t it worth a try? The relationship between employee value and compensation holds just as true in "big ruthless corporations" as it does in more supportive ones.

For example, one of my employees recently related to me his experience at a prior company. This was one of those more stingy jobs and had a high turnover rate for entry-level employees. However, he applied the principles I’ve described. He developed a number of specialized skills and got deeply involved in some really important projects.

The miserly company was happy to be getting more out of him for the same pay—until the day he started looking at taking his skills elsewhere. His value was so great by then that the company would be set back months or years if he left, so when he suggested that he would need a 40% pay increase to stay, they felt like it was a worthwhile investment.

Despite the money-grubbing attitude of this company, he was providing so much value that he had become an asset they couldn’t afford to lose. As a result, he was able to negotiate a much better situation for himself. The moral of the story? If you feel that you deserve a raise, don’t get drunk and holler about it every Friday night. Take inventory of your worth, talk with your managers, and start working to become a more valuable asset.

related video: Do You Know The Best Way To Ask For A Raise?

Related: How To Nail An Interview With A Values-Driven Company


This article originally appeared on Glassdoor and is reprinted with permission.

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