I build and sell custom homes for a living. I buy the property, design the house (with an architect’s help), and oversee its construction. For the actual build, I use a trusted contractor I’ve employed for years, and whose work is outstanding. I rely on him and his crew exclusively now, he’s that good. In fact, if it weren’t for him, I might consider getting out of this business altogether.

     Here’s my issue: He keeps asking for a bigger piece of the financial pie. I pay him a very fair wage for his work (I’ve done my research), and I offer benefits too (healthcare, paid time off, and some flexibility in his schedule). He’s also guaranteed a steady paycheck, whereas I only get paid when—or if—the property sells. Depending on the market, that could mean I’ll make significantly less than what I project (or more; I admit I’ve been lucky). I’ve tried explaining all this to him, and that I’m the one assuming all the risk, but we keep having this conversation. I get that he’d like more money (wouldn’t we all?), but I’m tired of defending what I feel to be the very reasonable compensation he receives from me. Is there a better way to handle this? – Name withheld

Pay.

It’s so important.

Were our employers to suddenly stop paying us for some reason, I doubt many of us would show up for work the next day. And that’s true no matter how rewarding the job might otherwise be.

That said, it is critical for you, as an employer, to begin to think about pay in three (3) very distinct ways.

The first is in absolute terms.

Is the compensation you offer enough for your employees to get by on? In other words, can they afford some minimally comfortable, if not necessarily luxurious lifestyle—for themselves and their families? If not, it really doesn’t matter how many other perks you offer, what working conditions are like, or how great the job otherwise is. Your employees will always be dissatisfied, and likely continue to complain about their pay.

But it sounds like you’ve done your research, and what you offer does indeed meet this criteria.

Second, you need to think about pay in symbolic terms.

On the one hand, you describe your contractor’s work as ‘outstanding’. No doubt you’ve told him this – or your decision to use him exclusively communicates as much. Yet on the other, you say you pay him a ‘fair’, or a ‘reasonable’ wage. Note the disconnect. If his work is indeed excellent, he’s probably wondering why his compensation doesn’t reflect this fact. Put your money where your mouth is!, he’s probably thinking. As the authors of The Enthusiastic Employee (2005) explain:

…pay has great symbolic value to workers—it signifies respect, achievement, and equity.[1]

And third, you should start thinking about pay in relative terms. Not just what you pay your contractor relative to his industry peers though, although that is important.

More specifically, how much do pay him relative you?

Do you cruise around town in a brand new Tesla, for example, while he’s still milking the last few miles out of a rusty old pick-up? Do you dine at the only the finest restaurants, while he settles for take-out? And when you vacation, do you stay at expensive hotels in exotic locales while he’s more likely to be found car-camping in local parks – if he takes time off at all?

I doubt things are as lopsided as that in your case, but you get my point. People experience pay as much in relative terms—especially relative to their immediate coworkers—as they do in absolute spending power. If your colleague (or manager, or boss) enjoys a lifestyle you can only dream of, you’re apt to feel ‘underpaid’ even if you’re reasonably well-compensated yourself. And why not, given all that money is coming out of the same bank account? Or if there are big differences in what organizational members make, there better be a pretty good reason why.

Absolute, symbolic, and relative terms. These are the considerations to keep in mind when deciding how much to pay someone.

Finally, I can appreciate your frustration. It’s no fun to revisit the same conversation again and again (I doubt your contractor enjoys it either) – especially if you feel you’re in the right.

But consider the following: The next time you negotiate the sale of a house, I suspect you’ll try to get as much as possible for it. And for good reason; obviously it’s in your best interests to do so. It also wouldn’t surprise me if, during those negotiations, you mention the high quality of the construction as a selling point.

Understand that your contractor is simply doing the same thing here. He’s negotiating the best possible ‘price’ for his labor, based on precisely the same motivation, using precisely the same argument.

I encourage you to keep this in mind the next time he brings the subject up.

NOTES

[1] Sirota, David; Mischkind, Louis A.; Meltzer, Michael Irwin, The Enthusiastic Employee, (Wharton School Publishing: Upper Saddle River, NJ), 2005, p. 82.