It's the Spread

“Thirty six thousand dollars!”

“You’re proposing to pay him thirty six thousand dollars a year? We can’t afford that.”

“It will be tight, but I’m pretty sure that’s what it will take to get him. I really like this candidate.”

Discussions such as this happen all the time in small businesses. The company is in a hiring mode, the recruiting and interviewing has happened, and now it’s time to narrow it down to a specific candidate and make an offer.

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It can be agonizing. I’ve been there and I’ll bet you have, too. Help is desperately needed but the best candidate seems too expensive. Heck, maybe any candidate seems too expensive.

Let’s listen in on the discussion the other interested parties in this situation are having:

“Thirty six thousand dollars!”

“Honey, you were making forty thousand when you were laid off. I don’t think we can afford to accept thirty six.”

“It will be tight, but I’m pretty sure that’s the best they can do. I really like this company.”

Two sets of people on either side of a salary negotiation. Both are looking at the same number and of course considering things from their vantage point, and with their own interests in mind.

The number they’re all focused on – annual salary – is the number we all use. Employers use annual salary to measure the cost to the company, and employees use it as the measure of compensation received.

But let’s dig deeper. What’s the real, full cost to the company for a $36,000 per year employee?

Salary                                                 $36,000

Plus payroll taxes                          $  3,750

Plus benefits                                     $  6,000

Total cost to company:   $45,750

What appears to be a $36,000 cost is in reality going to cost the company almost $46,000.

Now, let’s look at the employee’s side of the ledger.

Salary                                                                         $36,000

Less payroll taxes                                                  $  2,754

Less income tax withholdings                           $  7,200

Less employee’s share of benefits cost          $  1,000

Employee take-home:                                          $25,046

To drive home the point:

Employer cost                                   $45,750

Less employee take-home            $25,046

Difference                                $20,704

That’s quite a spread between the company’s actual cost and the employee’s actual spendable net.

I suggest that these are the two numbers that deserve the attention of the folks involved. In this light, the annual salary almost becomes meaningless.

Yet, all over America time and energy are spent negotiating a number that has little real-life importance.

I know – we won’t stop talking about annual salary. Too much pride is tied up in that number, and it is admittedly a convenient yardstick.

To me, the big deal is the spread. Here are the take-aways:

• Employees deserve to know what it costs their company to employ them, and the total value of their compensation package. Let’s tell ‘em.
• Both employers and employees can help reduce the spread. Employers can choose pre-tax benefits, reducing payroll tax. Employees can make healthy choices and wisely spend deductibles and company-provided benefit dollars.

I’d rather spend my time cooperating with employees to reduce the spread than arguing over annual salary. How about you?

Bill Collier is the St. Louisarea coach for The Great Game of Business. He helps businesses improve results by teaching their employees to think and act like owners. He is the author of “How to Succeed as a Small Business Owner … and Still Have a Life” Bill can be reached at 314-221-8558 or billcollier@greatgame.com.