You're the Boss January 23, 2014, 7:00 am

Deciding How Much Employees and Owners Should Make

By JAY GOLTZ

In my last post, I wrote about my decision not to pay year-end bonuses. As usual, I received some insightful comments in response, including several suggesting that I start sharing more information with my employees so that they have a better sense of how the company is doing. This is something I have thought about quite a bit and I intend to do.

 

But one commenter who asked a series of questions about how much my employees are paid really gave me pause. She asked whether all of them are paid a “livable” wage, whether any are on food stamps, whether they get health insurance, and whether I get paid more than 25 times the salary of my median employee. 

Obviously, these questions reflect a perception of business that has been encouraged by the numerous reports of certain big businesses – Walmart, McDonald’s — that pay employees so poorly that they qualify for food stamps and other forms of relief. But I feel compelled to defend small businesses from being associated with what these businesses do. Part of the problem is that many of these multibillion-dollar corporations cleverly finance organizations that lobby against increasing the minimum wage — often on the grounds that higher wages will destroy small businesses. And we can’t have that!

While these corporations try to hide behind small businesses, the reality is that most of the people making minimum wage work for large companies. That was the finding of a study by the National Employment Law Project, an organization that supports raising the minimum wage, and that’s also been my personal observation.

 

That said, there is a limit to how much businesses, of any size, can afford to pay in minimum wages. While the current minimum is certainly too low, I get nervous when I hear people talking about increasing it to $15 an hour. Some people may consider that a “livable wage” – but I believe that a $15-an-hour minimum wage would create huge problems for businesses. I suspect there is a reasonable compromise somewhere between $7.50 and $15 – possibly the $10.10 an hour that has been proposed in the Senate (and which would merely allow the minimum to catch up with inflation). But while the precise number is open to debate, there is one aspect of this discussion that is not — the need to factor risk, reward, and return on investment into the equation.

And that brings me back to the commenter whose questions gave me pause. Let me answer her first three questions, all of which I think are fair. Do I pay a livable wage? Obviously, this depends on your definition of livable. I wouldn’t presume to speak for my employees, but by all appearances they seem to be making it work, and our turnover is very low. Are any of my employees on food stamps? I don’t know how they could be. They certainly shouldn’t qualify. Do my employees get health insurance? Most have it, and they are all offered it. But then comes her final question, which I think betrays a lack of understanding of how business works. She asked whether I get paid more than 25 times the salary of my median employee.

I do not. But I expect I will some day. The fact is, if a private company gets big enough and successful enough, it’s almost inevitable. At some point, a healthy company’s profit has to be 25 times the average wage. If not, something isn’t working.

I’m not sure when and where the notion of comparing the salaries of chief executives and median workers got started, but I’m sure it was in response to the skyrocketing salaries paid to executives at public corporations, which is a legitimate issue. But this kind of analysis makes no sense when the company is private and the person running it is an entrepreneur or an owner.

This is where risk, reward, and return on investment come into play. Business owners do not get “paid.” They get what is left after all other expenses have been paid, if anything. Sometimes, there is nothing left, and the owner loses money. Interestingly, while profit-sharing is almost always a popular topic, I don’t remember ever hearing anyone talk about loss-sharing. And that’s why it makes no sense to apply the C.E.O. salary multiple argument to a privately owned business. I started the company, I borrowed money against my house to finance it, I have tremendous risk exposure, I took the losses in the lean years, and I do well in the good years.

But what I take home has nothing to do with some arbitrary multiple. Instead, it depends on how much profit the company makes — and on how much money has to be reinvested in the company to build up cash reserves, to meet the covenants the bank insisted upon when it lent the business money and to pay for inventory, receivables, equipment, research and development, and even new salaries.

Many business owners would love to pay their people more, but the competitive marketplace does not always allow it. Trying to pay people well and drive a healthy bottom line is a constant balance — especially under the conditions we have had the past five years.

Jay Goltz owns five small businesses in Chicago.