According to ESPN reports, Mike Trout of the Los Angeles Angels (and without doubt the best player in baseball), will sign a 12-year contract extension worth a guaranteed $430 million.

That won't just make Trout the highest-paid player in baseball, eclipsing contracts like Bryce Harper's recent 13-year, $330 million deal. Trout will make just shy of $36 million per year, making him the highest-paid player in baseball on a per-year basis.

Which begs an obvious question: Is a baseball player worth that much?

Is any employee worth that much?

Good questions.

The glib answer to the first question is, "Yes," simply because the Angels appear willing to pay Trout that much. The true value of anything is what a ready, willing, and able buyer is willing to pay, and the Angels are clearly all of those things.

But the second question, the larger question, is one that every business owner -- and every outstanding employee -- must answer:

What Are Truly Exceptional Employees Worth? 

To answer that question, consider sales. Is it possible to pay a superstar salesperson too much?

Generally speaking, the answer is no.

Unless you also think your business can make too much.

Applying an arbitrary constraint like capping sales commissions, or limiting the total amount a salesperson can earn in a year, often does more harm than good.

But lots of businesses do, like an entrpreneur I know who owns a $20 million company.

"After a salesperson reaches $80,000 in earnings we apply a sliding scale to commission rates, and we cap any salesperson's total income at $95,000 per year," he told me.

"Why?" I asked.

"Because that's fair compensation for the job they do," he replied.

"Maybe so, but isn't that shortsighted?" I asked.

"Absolutely not," he said. "Shortsighted would be allowing salespeople to make more than our top executives."

"But if a salesperson sells more, doesn't your company make more?"

"Yes..." he replied, "But there still should be limits to what salespeople can make."

No, there shouldn't be limits.

Not if pay is based on performance.

Say you pay a 10% commission on sales. (How did you arrive at 10%? There are a number of ways to determine an appropriate commission rate, so we'll assume you assessed fixed and variable costs, calculated and targeted margins, and decided what your business can afford to pay in commissions and still make a reasonable profit.)

A salesperson who generates $500,000 in sales earns $50,000. You're satisfied with $500k in sales because it makes your operating budget work, but you'd really like $700k and are happy to pay $70k in commission.

But what if your top salesperson generates $1,000,000 in sales? You love the impact $1mm makes on your top line... but paying a salesperson $100k makes you feel a little queasy, especially if that amount is near (or over) what you make.

"Wait," you think, "I'm running this place. I have the most responsibility. Why should she make more than me?" Then you think some more. "Plus, we simply can't afford to pay a salesperson $100k. That's crazy. So we should cap total compensation... or better yet drop the commission rate to 3% after $700k in sales, and 1% after $800k."

And at that point... you've lost the plot.

Superstar Employees Really Are Worth More

Not only can you afford to pay a 10% rate on $1,000,000 in sales, in reality you can afford to pay more than 10%.

Your fixed costs -- and some of your variable costs -- are no longer part of the equation because they are offset by the first $500k in sales. Incremental sales are more profitable because they are only offset by direct variable costs: Product costs, shipping, sales commissions, etc. If your business nets 20% on $500k in sales, generally speaking it should net even higher margins on $1,000,000 in sales.

That's why you can afford to pay sales superstars more, not less. When sales pay is based on performance, too much is never enough. 

That's why you should be willing to pay your best employees more. Remove arbitrary constraints, especially constraints based on emotion rather than objective analysis.

And that's why Mike Trout is worth more.

How much would you pay Tom Brady? More. How much would you pay Steph Curry? More. How much would you pay Lionel Messi? More.

Pay your best employees -- your truly outstanding employees -- more. 

They're worth it.

Published on: Mar 19, 2019
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