A friend who runs successful company
faced thorny issue recently. He had chance to hire real superstar in his industry away from his arch-rival. But she was very expensive. So expensive that she would distort the company’s compensation structure. She would be earning more than some of her bosses, and twice as much as most of her peers. My friend was conflicted. part of him thought this was fine. It would be worth the extra money to deprive the competition of her services. And yet part of him fretted that it would eventually make his company’s total compensation budget spiral out of control.
I wasn’t sure I was the right person to advise him Ñ because I have very strong views on the subject of overpaying for talent.
I realise there’s lot of factors that go into salary decision. For example, my friend wouldn’t be overpaying her if the additional revenue she brought to his company offset her gargantuan salary. She would be worth every cent. Also, if the revenue she added to his bottom line was coming out of the competition’s pocket, that would be double win for him. Anything that weakens your rivals, strengthens you.

Money should never be the only reason.
What worried me, however, was whether money was the only reason for joining my friend’s company. I’d prefer that she was being lured because of money and at least one other reason Ñ for example, she likes the company’s product line, or she prefers its corporate culture, or she truly believes the new company offers better prospects for growth.
In my experience, if money is the only reason someone joins your organisation, then money will be the reason they leave you. Someone else will always be willing to pay more.
That’s the trouble with overpaying employees. It turns the employer-employee relationship into mere numbers game. How much will you pay me to work for you? In my mind, there has to be some other emotional glue binding people to an organisation. It could be sense of fulfilment in doing something important. It could be charismatic boss who engenders tremendous loyalty. It could be something as mundane as liking your colleagues. They’re your friends. They’re fun to be with. But it has to be something other than just money.
It also creates paradoxical situation, where you’re more likely to retain employees if they’re slightly underpaid rather than overpaid. Why? Because in paying your people fair Ñ rather than grossly exaggerated Ñ wage, you’re forcing their job to be about something other than salary. And that’s good.
It’s difficult for managers to accept this paradox Ñ that overpaying people means you’re more likely to lose them, but I’ve seen this time and again.

Combat pay
This brings up another irony of the overblown pay cheque. Sometimes companies overpay new employees because they have to.
The organisation is so dysfunctional, the atmosphere so toxic, that the only way to attract good people is to overpay them. It’s like “combat pay”. But the result is the same. You can’t reward your people with combat pay forever. Eventually, they get shell-shocked or war-weary; they burn out and leave.
In the end, I told my friend to hire this talented woman but also to offer her little less than she was demanding. That’s the best way to find out if she has at least one other compelling reason for coming aboard. I wasn’t concerned that her outsized salary would wreak havoc on the organisation. If money was her only reason for signing up, she would probably be gone to another job (that pays even more) before she does too much damage to the compensation structure.

Mark McCormack is the founder of International Management Group.

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