How can an individual earn a higher salary? I’ll dispense with the usual bromides on how one can increase salary through additional training and certifications, how to ask the boss for a raise, or looking for increases in benefits when additional money for wages isn’t available. That has been written be a variety of people and is available in hundreds of magazine articles and adds for technical training schools. This is more of an analytical look into what determines salary, or more accurately, what determines maximum salary levels. What determines how much an employer is able to pay?
Labor unions have tried to raise wages for workers and have had some success, although in later years many of the workers represented by those unions have lost their jobs as the companies have moved manufacturing overseas or gone out of business. There are also calls in cities like San Francisco for “living wages.” The idea is that employers should simply pay their employees more because the employees need at least that amount to pay for necessities. A simplistic look at the factors that determine wage would have shown the reasons why it is not possible to raise wages through pressure or dictate.
Imagine that you are a small business owner – in fact you are a one woman shop. As long as you do not have more business than you can do, you would not hire any workers. Hiring workers means dealing with other people, worrying about complying with regulations and filing paperwork, and having to cede control over a part of your business – your blood, sweat, and tears – to another individual who probably doesn’t have the same passion. Eventually though there will be more business than you will be able to do on your own. At that point it will be necessary to hire someone.
Now, lets say you are selling widgets at $50 each and it costs $30 per widget in materials. You also have fixed costs (for rent, lights, debt, etc…). If an employee can make 2 widgets per hour, you obviously could not pay that employee more than 2 x $50/widget – 2 X $30/widget = $40 per hour. Also, since you only hired an employee to allow you to make more money than you could do by yourself, you would want to make a profit. There are also those fixed costs of which I spoke. This means that you might pay $20 per hour.
Notice that it does not matter what the employee thinks he should be paid, or what a local worker’s advocacy group thinks that employee should be paid, or what a union representing that employee thinks he should be paid. If you do not make more money due to that employees production than you are paying him in salary and benefits, why would you keep him around?
So how can you make a higher salary? Well, lets say there are two employees, one who makes 3 widgets per hour and one who makes 2 widgets per hour. Obviously you could afford to pay the employee who makes more widgets more since the amount you make from him is more. If you needed to lay people off, the employee who only made 2 widgets per hour would also be the likely choice. Therefore, your production will be a factor in determining your salary.
Lets now say that one of the employees created widgets of higher quality for which customers were willing to pay more, or that customers prefered over a competitor’s widgets. That employee would also be able to command a higher salary because she is allowing more products to be sold and/or more to be charged per product. Note that since today many jobs are in service where the product to a large extent is the customer experience, employees who are able to please the customer will be more valuable. Going the extra mile and simply being pleasant can go a long ways towards raising your salary.
So what if you are very productive and have produced a lot of customers for the company but you still feel you are not paid what you are worth? Part of the beauty of the free market is that if you truly are making more money for your employer than your peers, you should be able to find a different company who will pay you more. If you constantly complain about your salary or workplace and are still working there two years later, quit complaining.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.