"I'm not giving RAISES due to INFLATION!"

That's cold, hard facts. I know it's mean, I know it's nasty, but welcome to adult land.

Hey, everyone, it's Mike Andes, and a couple weeks ago, Dave Ramsey had a caller that came on his show and asked him if they should give raises to their employees because of inflation. I would like to know how Ramsey or other businesses that you know are determining what fair pay is now, considering the recent inflation. I didn't agree with everything that Dave said, but parts of it were I thought were good. I'm going to go ahead and play a little bit of that clip, and I'm just going to cut out parts of it I think are pertinent. And I'm going to give my response as to whether or not I give raises based upon inflation or if it's based upon an evaluation or what the market rate is. So let's go ahead and watch the clip from Dave Ramsey, and then I'll go ahead and react to that.

Well, to start with, I would reset the table on the people that work for you. People at Ramsey hear me say regularly, your raise is effective when you are. You know, we have never given an inflation raise the history of this company, nor will we. You are paid what the position pays in the marketplace, and that's fair and that's right. And truthfully, anybody that's got a job out there, you're paid what you can be replaced for. That's cold, hard facts. I know it's mean. I know it's nasty. But welcome to adult land. Number two, part of what affects what you can be replaced for is how good at what you are at what you do, how excellent you are at what you do. And that makes it harder to replace you. When you're adding value to an organization, they want to add value to your paycheck. But that doesn't mean we give everybody 8% raises. Because the news says inflation was 8, went up 8%. You can't afford to do that, number one. Number two, it's not fair. Number three, it doesn't make sense from a business perspective. From a business perspective, as the cfo, your job in hiring is to get a rate of return on every dollar of payroll, and that's based on their productivity, not based on inflation.

To help, by the way, you'd need to communicate this. But the reality is, let's play this out. They think that they should get a bump for inflation. So if we play that, that means you take it away as soon as inflation begins to subside. And they wouldn't be cool with that either. So compensation is never built on and should not be built on inflationary pressures in the economy. It's about profit and loss and as Dave said, value. And it's. The marketplace does set the bar. The marketplace does. And so I would tell you this is not a compensation or inflation issue. What you have is a leadership issue. And this is hard. But you've got to communicate this properly to your team.

Again, here's the thing. We share profits with our team. That's correct. Profit sharing program. When there's profits, we share it with the team. The systematic process that we use to do that, we did it since we're a little bitty company, but we've never paid someone based on what it cost a gallon, what a gallon of gas cost. You don't want to be paid on that because at one minute it's $5, another time it's $2.

Yeah.

And you want me cut your pay? It's a roller coaster in half. Let me cut your pay.

It makes no sense.

You know, we're using the gas pump index to set your pay this month. That'd be popular.

So the question is, do I think that people should be getting increases in pay because of cost of living going up? And in our case, which we're going through right now, hyperinflation, lots of inflation, things are going up, expensive, more and more expensive every single day. Should we be giving our employees a raise based upon that? And the long and short of it is I don't feel like that should be the case. But what you have to remember is that inflation doesn't go away and the prices go back to zero. If that happened, we have deflation and we're not going to have, have 8%, 9%, 10% deflation, where the prices go back to what they were before. So the fact of the matter is, is going to cost more for the employee to buy food, buy groceries, go out to eat, travel, fuel for their vehicles, etc. And that's not going away. We might have inflation slowed back down to 2 or 3%, but that is not going to, it's going to compound. It's going to keep growing every single year. It's not going to go negative. That would be deflation. So ultimately it's costing more and more for employees to live. So they need to make more money in order to survive and provide for their families. So this is the solution that I believe is good for laborers, for entry level employees and for employees that are not executives. We're not talking about like high Level management. We're not talking about accountants or lawyers, but I truly believe that for laborers and for entry level positions, it's the best way to pay someone is to base it upon their actual performance and how much revenue they're bringing to the business. Ultimately, do they move the bottom line for the company? Therefore, that is the amount of money that they should be making, not based upon who likes the boss the most, who went out to golf with the boss on the weekend, who asked the boss for a raise, who's been the squeaky wheel that gets the grease and therefore gets an extra little bit of money slid to them. I don't feel like that's the right way to pay people. I don't think it's a meritocracy by which people get paid more the more harder they work and the more that they bring to the business and the more they offer. I don't think that is fair. I don't think it is right. But this is what I feel that Dave is missing here is you have to realize that your employees are the ones that make the business run. And yes, we put as business owners, we risk capital and that's why we get the outsized returns. But you have to realize that your employees are the ones that are actually generating the revenue for the business and not management, not the people that are executives are doing strategy. But usually the frontline employee is the one that's actually making the revenue for the business be possible. And so my opinion is, look, if I'm giving the employee a percentage of the revenue that they make for the business, I need to make sure that I raise my prices quick enough to, to match inflation, not only to cover the expenses that the business is incurring, but also cover the additional wages that that employee is going to cost because they need more money to survive. And so across the board, we should be raising prices in our businesses along with inflation. And if we're paying our employees a percent of the revenue that they make for the business, we are inherently giving them a raise that's going to stay up with inflation. This is why I give a percent of the revenue that employees make at the bottom line to the business. I give them a percent of that revenue. Every single minute, every single hour, every single they're working, they get a percent of the revenue that they make for the business. What that means is if I raise the hourly rate to the customer, that that is effectively going to give a raise to the employee. And so over the past couple of years at our local shop, that is Augusta lawn care. We do landscaping and lawn care. We've gone from $60 an hour all the way up to $85 an hour over the past few years. Now, in doing that, because I give about one third of the labor revenue to the employee, that delta of $25 per hour increased, that we are charging the customer, I'm effectively giving about an $8.25 raise to the employees because of that price increase. Now, what this also does is align the goals of the employee with that of the business. And if we're going to raise prices to our customer, we better be providing a better value. We better be providing more professional service than the guy down the street, the chuck in a truck that's going to charge 30 or 40 or $50 per hour. If we're going to charge 85 or we better be at a different level, different caliber, higher professionalism. And so if the employee realizes that in order for us to charge a higher price and therefore I get more money in the form of a raise, I'm going to need to be able to be more professional. I'm going to need to be able to drive an appropriate speed and not tailgate people. I'm going to need to be able to be professional and talking to the customer and ask for the referral and ask for an upsell. And I'm going to have to put my sales boots on and try to get this customer to buy more services. If they start to realize that, they start to realize that the value that they're providing to that customer is $85 an hour. If we want to raise that number, we've got to be more professional, we've got to be more punctual, we've got to be more professional, talk to the customer, make that personable connection with the customer. These are all things that go into the value proposition allowing us to raise the price to the customer by which it covers the cost of inflated expenses for the business and covers the inflated cost that the employee is incurring in their personal living expenses. So in my opinion, P4P pay for performance is the way of the future at every level of entry level work. I understand that there's certain levels of strategy and creative work and advertising that potentially might not be based upon as easily on a minute, hourly or project based where you give a percentage of revenue. But I believe that most, most employers in the small business industry, especially home improvement, should be giving a percent of revenue to their employees. It's the most democratic way to make sure that people are getting paid what they're worth and not based upon who they know, how long they've been around, but actually what's driving business results for the company. If you want more information about this something we called Pay for performance, this video right here will answer all of your questions. I talk about the reasons why I did not want to institute this. I thought it was going to tear apart the team. I thought that it would lead to lower quality. But that was not the case. I was wrong. Check this video out here for an in depth analysis of what P for P really is.