Pay increases need to be a win-win situation if they are to keep coming.

A plumbing contractor once told me of a young employee demanding a raise because he needed more money to pay his bills. He seemed oblivious to the fact that pay increases are based on performance factors, not need.

At first I reacted like everyone else to the gall of that employee, but after looking at the situation from his perspective, I realized it’s easy to identify with that young man. Everyone wants to make more money, and many need to make more money than the job they have realistically can pay. It’s the main reason people go looking for better paying jobs, or start moonlighting. It drives people of low character to steal from employees and/or customers.

So let’s come at this issue from a different direction. Keep in mind that pay scales are determined mainly by the nature of the job and the cost of replacement. What opportunities do you provide for your topped-out employees to earn more money?

I addressed this subject a couple of years ago in a "Service Sense" business tape recorded for Grandy & Associates, titled "Ten Ways to Earn A Pay Increase." It was aimed at plumbing-heating-cooling service technicians, but I think it has lessons for other kinds of contracting firms as well. (For more information about the "Service Sense" tapes produced by Grandy & Associates, call 800.432.7963.)

Ten Ways an Employee Can Earn a Boost in Pay.

1. Increase the company’s sales and profits. The most obvious way to justify more money is to make more money for the employer. This is the fundamental premise of incentive compensation systems. A poorly designed incentive pay system may defeat its purpose if it’s too hard for employees to achieve goals and make good money. Straight commission plans also create incentives to mistreat customers. Monitoring systems need to be in place to prevent abuse. Salaried and hourly sales employees can earn more money from commissions on add-ons and upgrades. Any company that doesn’t offer such opportunities is doing itself and employees a disservice.

2. Save the company money. The flip side of that coin is letting employees share in identifiable savings. All business owners ought to have standing offers of rewards for documented money-saving ideas. The key word is documented. It’s easy for an employee to boast of coming up with a valuable idea, but can he or she prove it? By all means share savings with employees, but put the onus on them to show in dollars and cents how much they are benefiting the company.

3. Develop a sense of ownership in the company. It’s customary for employees to refer to "my company" or "our company" in describing the workplace to family and friends. You want them to take the next step by always looking for ways to help the company succeed, and by sticking up for the company and management when co-workers snipe at it. In some employee circles, being identified as a "company man" is a mark of derision, the equivalent of "brown nose" or "suck-up." You need to help your people overcome such peer pressure. Getting to that stage requires that they have a reason to feel like an owner. Some sort of profit sharing or bonus plan is a big help here. If they don’t have a personal stake in company prosperity, it’s pretty hard to get them to look out for anything beyond their own paychecks. It takes more than money, though, and sometimes it doesn’t even require extra pay. A sense of ownership comes when people get consulted on decisions that impact them, and feel their ideas are taken seriously.

4. Take on more responsibility either in sales or management. Employees need to understand that some jobs are more valuable than others. The person who sells a job usually gets compensated higher than the person who performs the work. People who supervise others usually earn more than those who don’t. More often than not, taking on managerial responsibilities is a route to higher pay. Be careful, though. The worst mistake many contractors make is to automatically promote their best sales or craft performers to managerial positions, which they often are not cut out for. It’s not necessarily wrong for top producers to make more than the managers who supervise them. This is one way to keep talented performers doing what they do best.

5. Become irreplaceable. Theoretically, in a well-managed company nobody is irreplaceable. You want to create a company that will continue to function well no matter who leaves. In the real world, however, most companies have one or two individuals whose departure would cause huge problems. You want to encourage people to become so good at what they do, it would be painful for you to see them go. Motivating people in this way requires a keen balancing act. You want to appeal to their pride and encourage them to develop their abilities to the utmost, but at the same time not create a prima donna, or someone who feels that he or she has the company "over a barrel." A good analogy here is that of a football coach, who must find ways to extract the best performance out of his players, yet still keep them mindful of teamwork. Not an easy task, but not impossible.

6. Acquire more expertise. Some contractors keep a "skills inventory" for their craft workers. The more jobs a person is capable of performing, the higher his/her pay. When pay scales are tied to the level of skill acquired, this creates an incentive for employees to constantly learn and grow. A skills inventory can be applied to office personnel as well as field staff. For instance, a bookkeeper might become more valuable by taking night classes to learn accounting.

7. Suggest a change in the way your company compensates craft workers. In some cases a commission-based compensation plan, or one based on piecework, could work to both the employer’s and employee’s advantage. Most workers will resist any kind of change to incentive compensation. The best way to make the transition is to continue paying hourly wages, but keep track of pay both ways for several months. In many cases your employees will come to realize they could have made more money via the incentive program.

8. Upgrade people skills. As I said on my "Service Sense" tape, "To the customer, you ARE the company that employs you. No matter how good you are with the tools in your hand, a sour personality undermines the work you are able to accomplish. It will also influence whether or not the customer calls your company back," or whether your company gets recommended for another job. Over time, superior people skills will pay off. Craft workers who know how to "schmooze" get more praise from customers. Some will ask for them by name to perform their work. If a likable person makes a mistake, customers will be more willing to forgive that person than they would someone they don’t like. People skills also come into play around the office. Performance often is harder to measure for office staff than for those working in the field. Owners would rather give pay raises to employees they like than to those who are a pain in the neck to deal with. Consider interpersonal factors in gauging performance. Productivity is bound to go up more when co-workers get along than when they are at odds with one another.

9. Help the company enter a new business or acquire a new customer base. Pay your employees a finder’s fee for any work they bring in from friends and relatives. Maybe one has a connection with a uniform company or an insurance agent that can offer special deals to your company. Offer to share any savings from such an arrangement. If you keep probing, you’ll find that most employees have business connections with someone who can benefit your company in some way. Offer to share the wealth with any employee who brings in profitable business.

10. Pay recruiting bonuses. Recruiting talented people to your company is the biggest problem faced by virtually every contractor. And it’s not cheap. Think of how much you spend on newspaper and other recruitment ads, then all the time spent orienting and training new hires. People who have crunched the numbers say employee turnover typically costs $5,000 to $10,000 a head. You can shortcut the process, and get off cheaper, by turning your entire staff of employees into in-house headhunters. Offer a substantial bonus, say, $1,000, for every referral that results in a permanent employee. Some companies use a phase-in program, paying, say, $300 after the employee completes three months on the job, another $300 after six months, with the rest collectable after a year. There are a number of ways to structure the payment—and don’t necessarily think of $1,000 as the upper limit. Employees recruited via other employees tend to be more reliable than those attracted off the street. Always give your employees first crack at helping you fill a job opening.