Millionaire CEO: Are you paying your employees too much?

Summary

• Overcompensating employees based on rapid company growth or personal beliefs about money can create entitlement and a reduction in the desired work ethic.
• Align employee compensation with fair market value, regardless of how the business is performing financially.
• Use established benchmarks (like pay scale or salary.com) to determine fair pay, taking into consideration company size, revenue, and the employee's skill set and experience.
• Understand that paying more doesn't guarantee better performance or loyalty from employees.
• Avoid giving raises based on temporary increases in workload or client influxes; instead, evaluate the situation over a period like 90 days to ensure it is sustainable and that the employee can handle the new responsibilities.
• Realize that offering a higher salary for a position may not attract better-qualified candidates and can lead to hiring less experienced individuals with inflated pay expectations.
• Develop a compensation philosophy that is grounded in research and fair market value, not feelings of guilt or the desire to spend excess company revenue.
• Admitting to and correcting mistakes in compensation may lead to employees leaving but is necessary for the long-term health of the company.
• Use the lessons learned from inadequate compensation practices to establish policies that align with fair market value and shield the company from emotional decision-making regarding pay.

Video

How To Take Action

I would suggest implementing these steps to develop a sensible approach to employee compensation:

• Avoid overpaying employees based on the company’s success or personal beliefs about money. Overcompensation leads to entitlement and a drop in work ethic.
• Find out the fair market value for employee salaries. Use resources like payscale.com or salary.com to match compensation with the company size, revenue, and the employee’s skills and experience.
• Remember that paying more doesn’t always mean getting better performance or loyalty. Pay for the value the employee brings, not the success of the company.
• When there’s a temporary increase in workload or client influx, wait for about 90 days before deciding on a raise. This allows time to confirm if the change is permanent and if the employee can manage the extra work.
• Keep in mind that offering a high salary doesn't guarantee better-qualified candidates. Stick to fair market value when hiring to attract the right kind of applicants.
• Develop a compensation philosophy that’s based on research and objective benchmarks, not emotions. Stick to it to avoid making impulsive decisions.
• If you’ve realized that you’ve made mistakes in how much you pay employees, it’s okay to admit it and make changes, even if it means some employees may leave. It’s essential for the long-term health of the business.
• Use these insights to establish policies that prevent emotional decision-making in terms of pay and make sure they are communicated clearly to the team.

By following these guidelines, you’ll help create a fair and sustainable compensation system that’s good for the employees and the business.

Quotes by Leila Hormozi

"Your desire to pay people well and to take care of people has actually created behaviors in those people that are less than desirable"

– Leila Hormozi

"Paying someone and what you pay someone should never be tied in to how you feel or your emotions"

– Leila Hormozi

"Your business making more money does not mean you should pay people more money"

– Leila Hormozi

"You're going to pay them a salary that makes sense in accordance with their skills they're providing to your business"

– Leila Hormozi

"Just because there's a sudden increase in workload or responsibility you should not immediately give someone a raise"

– Leila Hormozi

Full Transcript

want to talk about is one of the most painful mistakes that i see companies uh and i have also made on the way to 10 30 50 100 million dollars so that mistake is how you compensate your employees and i actually feel really passionate about this subject because it is one that i atrociously messed up and i have seen over and over again that people um tend to overlook this and not understand the importance of it in the beginning and i wish i had known sooner and right now actually with one of our portfolio companies they are learning it the hard way you know we came in and the the setup that they have with a lot of their employees they are realizing now does not make sense and is creating behaviors in their employees that they do not want and so i want to talk about the struggle of this and just kind of share my story um so when we first started gym launch which is the first company that we we started together you know i had never managed people for i'd never led people before i actually had no experience and i especially didn't know how to pay people um you know i knew i had gotten paid in jobs prior and i understood you know based on googling things but what i didn't understand is how much your personal beliefs about money and your personal stance on money and maybe how you grew up et cetera affects how you pay people in the beginning and so what happened was you know a lot of overpaying and a lot of paying people who didn't have experience and a lot of oh we're making more we should pay people more et cetera et cetera and so what ended up happening was a couple of things one is that you know what i realized very quickly is that there were people who were being compensated you know maybe 40 above what they should have been and when i say should have been i mean what fair market value is for their services that they are providing to the company right and unfortunately what happens is that eventually you realize or you come to the realization that your desire to pay people well and to take care of people has actually created behaviors in those people that are less than desirable um and so what i've seen time and time again i experienced myself was that you know as soon as someone gets paid or overpaid they develop a sense of entitlement they develop a little bit of an ego and they they often get a different air about themselves and so it's something that i never could have anticipated because that's not how i've been and so we always assume that people are going to act how we would act if we were overpaid or given more pay right we're like i would be super grateful i would be like trying to do everything possible to make sure i like rose the occasion that is not how a lot of people act and especially if you don't know them well if your company's new they haven't been there for years this can completely distort their behavior suddenly they're like that's below my pay grade i don't want to do those things et cetera et cetera and the funny thing is it's not their fault it's your fault for not considering this it's a second order consequence of paying people inappropriately and i see this really often in companies that explode and that is exactly what we did and exactly what i see a lot of companies that we work with do the second thing that happens is that once you realize this and you realize that it's actually not nice to pay people more you're setting improper expectations for your future self and their future self then you realize crap like they're not a director they're not a manager and they're really overpaid and so i need to probably demote them and i probably need to change their title and i need to pay them less or i can't give them pay raise for like five years so you're like crap what do i do and then you have to have the conversation with them you're like listen i overpaid you and now i'm realizing i overpaid you and it was because of my feelings because i don't have a methodology behind it and now i need to under i need to cut your pay back to what is normal and you know what happens most the time when you do that they leave and so it's really funny because in doing what we are what we're trying to do is keep people and keep them incentivized and keep them feeling taken care of we're actually just setting them up for failure in the long term because your expectations are going to change it is very common for people who are new in business and who have just attained a ton of success very quickly in business to want to do these things but it is not what you want to do because it just creates this distorted behavior and a very weird relationship with money and so what i've noticed is a couple things one is that how you pay your employees is always going to be tied in to your personal beliefs about money and so a lot of the times we don't even know what those are until we have to deal with money so often especially when you suddenly receive a large amount of money which you know we work with a lot of companies who just explode overnight and then they're like what do i do with all this money it actually the money it used to be stressful not to have money and now having the money and not knowing to do with the money or how to pay people with the money feels even more stressful and so what happens is you just default to your most primitive beliefs and feelings and emotions and those often don't serve your business and so the biggest reason that big businesses have policies procedures and methodologies for around how they pay people is because paying someone and what you pay someone should never be tied in to how you feel or your emotions and often that is exactly how people pay people in the beginning it is based off their feelings and emotions i feel like they deserve i feel like they should i feel like we owe them that is a lot of the things i hear people say but those beliefs don't serve you um and so i kind of honed in on the three biggest beliefs that i have seen that tend to just bite people in the ass if they don't work on those beliefs and understanding why they are not serving their business and ultimately not serving their employees because you are setting them up for failure in the long run the first one is the belief that if the business makes more money i should pay people more money which is absolutely false just because you have a large influx of money should you spend it on everything should you act as if it will never end should you in a lot of people may say well that's not thinking abundantly if i don't want to pay people more and i'm like this isn't about abundance this is about what is fair market value for their services you can look at the size of your company the years you've been in business the revenue you have and the skills that they have and then you can see on many websites online you can go to pay scale you can go to salary.com and you can see what fair market value is and then you can develop a methodology which is okay how do i pay fair market value do i pay at the middle end of the spectrum the end or the high right maybe if you pay at the lower end of the spectrum it's because you have a lot of perks flexible hours work from home lots of benefits paid time off in limited vacation and if you pay at the high end of the spectrum maybe it's because you don't offer those you don't yet have benefits set up you don't have pto set up you don't have vacation setup which is the case for a lot of companies that are starting off and so that's the first one is that if your business makes more money that doesn't you should pay people more money the two are not intertwined because here's the other thing is that your business making more money is going to it is not finite that's not the end decision and so what do you do pay them less when the business makes less money no you get paid more when it makes more money and you get paid less when it makes less money and maybe some of your top level executives when you decide to do profit sharing or something like that if they've been there for x amount of years etc etc but employees should be paid fair market value because the business is volatile and most people want security and so you're going to pay them a salary that makes sense in accordance with their skills they're providing to your business the second piece or belief is that if there's a sudden increase in workload direct reports or an influx of clients i should give them a raise and this is very dangerous because again this is volatile what i see happen very often is that someone says okay well we're about to launch this new thing they're going to have way more responsibilities i need to pay them more and i'm like you don't even know if the launch is going to go well let alone like how many customers are going to come from it and you're going to pay them more in advance like this doesn't make any sense and the reason that it doesn't is because what do you do when it doesn't go well what do you do when you realize that they're not a leader and they have to have less direct reports right what do you do if the launch goes off and it's a complete bust what do you do if all those clients you're expecting to have come in don't come in and you've given that person a raise now you have to revoke something but wait you don't want to revoke it because that feels very uncomfortable instead they're just going to be overpaid and again creating this distorted view in their mind that they should get paid in advance for work that has not yet been done and so it never works out because then what ends up happening is you resent the fact that you're overpaying them they're not doing the work that you anticipated and so what's more reasonable to say is that i anticipate we're going to have an influx i'm going to wait until we have normalized numbers or until i see that you're the right person for this job to have this many direct reports and then we're going to visit you getting a raise again in 90 days fair and i explained to people i'm like listen it's because i don't want to give you a raise and then realize that this thing that i thought was going to contribute to your workload a large increase in workload isn't going to exist in 90 days and so we're going to wait 90 days and not make any changes because i don't want to do that to you and people are very amenable to that like thank you i don't want that to happen either because you know what people think sometimes people will think okay well if they overpay me then i'm also at risk of getting fired and then they get even more insecure about their role so the third belief is that if i offer more money i will get better and more experienced people true also not true okay this is what i've seen is that there's two kinds of people that will apply for a role one is the person who says that looks like the job i want it is similar to what i'm doing now it is a typically like a slight increase in pay and responsibility it is my next step right and so then they will apply for the job the other kind of person is somebody who says why not i'm getting paid almost half of that i have no experience but hey might as well give it a try like if you don't ask the answer is always no and those are always the two kinds of people that are going to apply for a job no matter what the pay is and so again it's one of the things that i've seen is that people assume if they put a high pay out there that they're going to get people whose skills match the pay and that's just not the case because there's a lot of people who are just trying they're just like there's some sucker out there that i'm gonna get to pay me twice what i'm worth because they don't know right and they can talk up their experience and all these things and all of that stuff but that is again something that you cannot be enamored by the fact that they applied for the position to look past hey what is their past experience hey what were they paid in their last job hey you know what if they what's their you know career trajectory right now is this the next step for them and so those are the three beliefs that i've seen that do not serve you in terms of how you play employees and they're the ones that are most commonly made and so you have to stay hyper aware of them now what i would suggest and i'll go over this in a different video is that you make a pay methodology okay it's a or a compensation philosophy you could say and so you basically decide how you're going to pay people and this protects you from your emotions because oftentimes you're going to at times feel guilty especially if again like i'm mentioning you're in a business that exploded and makes a lot of money you're gonna have this guilt feeling like i should be giving money away i should be doing more with it i should be paying people more because i have more of it and i have a feeling of guilt but other people in your business are not responsible for um you know obeying the feeling of guilt that you have and so whether you feel bad or feel good that should not affect how you pay people and i say this because like seriously it sounds like i'm almost against paying people more and i am not by any means i am pro paying people more what i am against is when you pay people more in the wrong way and then you set them up for failure because you say i'm paying you to do this and now because i made the mistake of doing it too early or doing it the wrong way or you're doing it out of motions now you're you're here and so now i either have to fire you or pay you less and both set you up for failure they're going to feel terrible and so it really comes out of the fact that i think it all comes from really good intentions but the outcome is less than desirable and so you can have good intentions but the impact can be detrimental to the business and so if you are experiencing this just really work on the beliefs you have around the money understand that just because the business makes more money you should not be paying people more understand that just because there's a sudden increase in workload or responsibility you should not immediately give someone a raise and also understand that if you offer more money for a role you will not always get people who are whose skills match that compensation and you should be diligent about doing your research and so i hope that this video made sense and broke some of your beliefs about why you should um not use your emotions to dictate how you pay people and you should come up with a compensation philosophy and i will definitely cover that in one of the coming videos so if you like this video go ahead hit subscribe and i will see you on the next one