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Three Effective Hiring Practices for Business Owners

Let’s talk about hiring.

People are constantly asking me, when should I hire? How many people should I hire? How much should I pay these people? And, how do I get over earnings guilt when my business starts to make money?

First and foremost, let’s talk about what happens inside of a big corporation when it comes to hiring. Inside of big corporations, they have budgets – they don’t just arbitrarily hire people. They have budgets that are allocated that tell a business unit leader exactly how much money they can spend when it comes to hiring. If your business is just starting out, this will greatly benefit you.

Your business is no different.

To make good decisions around #hiring, you must roll up your sleeves and dig into the numbers. The answer to how many people you should hire and how much should you pay them depends on the #FinancialHealth of your #business. Click To Tweet

If, for example, your business generates a hundred thousand dollars a year, or a hundred thousand dollars a month, you as a business owner should know a couple of things:

1. What is the cost of goods? 

If you are in a retail business, and you are generating a hundred thousand dollars in sales, your cost of goods would be what you pay for, let’s say the widget that you are selling. And so maybe 20,000 out of the hundred thousand is the cost of goods.

Then you need to know what is the cost of doing business. This could be rent, heat, hydro, internet, marketing fees, bank charges, cell phone bill, or software. Anything that you pay for on a regular basis to run your business would come out of that hundred thousand, and it would be called the cost of doing business.

Read here for tips on productive business planning.

2. How much profit do you want? 

Let’s say you have $100,000 in sales and it cost you $20,000 to buy the stuff you sold – you are now working with $80,000. Out of that $100,000, how much do you want to be profit?

If you wanted a $30,000 profit margin and set that aside for profitability of the business, you are left with $50,000 to work with when it comes to paying for the operations of the business and your team.

You need to look at how much you are going to pay yourself and how much you are going to pay your employees.

What often happens is we don’t look at these things logically – we look at them emotionally. We want to be good people, we want to compensate fairly, we feel bad that the person is driving a beater and we want to help them get a new car, or we want to help them get a mortgage.

That’s all well and fine, but you have to first and foremost build a financially successful business that can afford to pay people well, otherwise, you’re putting your business at risk.
If you step back and you look at it like a corporation would, they’d have a clearly defined budget that would allocate a percentage of their sales revenue to staffing.

This budget ensures they will always have enough money to pay the people they have committed to paying.

It’s important that if you make a commitment to paying someone that you can actually follow through on that commitment. Click To Tweet

For example, if you’ve decided you’re going to pay somebody X, but you wish you could pay them more, here’s what I recommend:

Introduce what’s called variable pay. 

Variable pay is basically pay for performance. In my company, if you are an employee, you have bonus objectives. There are two ways to implement variable pay:

a. If the company does a certain way and we split bonus objectives.

You can earn X amount of additional revenue at the end of the year or compensation at the end of the year.

You could create a structure like this, catered to the things that are most important for you in your business.

If sales are important, build your goals around that. If retention of clients is important, build your goals around that. Whatever it is that is most important to you, you can tie performance of your team to the company’s goals and objectives and compensate based on the organization and the individual’s ability to hit those goals.

b. Another way that you can do variable pay is commission.

Are you tired of being the only person who sells in your business?

Give people opportunities to sell and compensate them depending on your profit margins.

If your business has a cost of goods, you just chunked off 20 grand out of that hundred. But, if you’re a service-based business and you don’t have a cost of goods, then you have 20 grand that you could be working with in different ways.

Think about what you want your commission structure to be, and compensate people based on their contribution to the business.

It’s important if you want to create a positive culture for your organization and have people that stay with you for a long time, that you take a serious look at compensation and then you compensate people fairly and equitably for their contribution.

Hand of woman watering small plant in pot shaped like growing graph

I recommend that you have a compensation range for the roles that you give people. I recommend that you look at compensation and performance on an annual basis. And, I recommend that you create a way for people to earn more based on the contribution that they make through variable pay. I think those are all things that are good. But it’s not the only reason that people stay.

Other things that you can do that are part of an overall compensation package or culture that make a difference:

  • Additional vacation days so they can have time off with pay
  • Sick days
  • Gift cards on their work anniversaries and birthdays
  • Something special at Thanksgiving and at Christmas

There are different things that you can do to make people valued and appreciated. But I will tell you something, I would rather work for an employer, if I was still an employee, who treated me well and valued me, and really gave me positive feedback and growth opportunities. Learn more about value, and reasonably priced relationships here.

I’d rather work for that person than work for somebody who is nasty and mean-spirited, but pays me really well.

It’s not always just about the money.

3. How to get over earnings guilt. 

It is often the case that in the beginning, business owners don’t have a lot of money, so they do everything themselves. Then, when they have a little bit of money, they hire inexperienced, inexpensive people to do the work.

When they get to a point where they have all kinds of money and they over-hire and throw money at problems unnecessarily. And then they start to feel guilty because they have money. Don’t do this.

When you have money in the bank, that’s what you’re supposed to do.

You're supposed to generate a profit in your business, and you're supposed to keep some of that money. The profit that you generate in your business should translate into cashflow in your bank account. Click To Tweet

When you have cashflow on hand, your business is in a stronger position to last long term and to ride the waves of change.

Here’s an example:

In 2020, when the pandemic hit, we lost a few clients. I made a very conscious decision to talk to everyone on my team who was an employee. I shared with them how many months worth of cashflow we had in the bank, because I did not want people on my team to be worrying about their jobs.

Don’t get yourself into a situation where you feel like you need to spend all of that money, and then down the road, you don’t actually have working capital to invest in your business, hire an extra person, or have strong enough cashflow to weather the storm.

You don’t have to share your financials with anybody outside of yourself and your business. You should not feel bad for running a business that is generating a profit if you are compensating people fairly, you’re giving them opportunities to earn more and you’re creating a culture where they feel valued for their contribution.

If you’re doing all of that, you deserve to make a profit and you deserve to pay yourself and pay yourself well too, and to keep some of that profit in the bank so that you have got security and cashflow for operating your business.

What are some effective hiring practices that you use? Let me know in the comments below.

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