Understand value creation before you ask for a pay rise

Employee value

Working with people I have realized that quite a majority of people does not really understand how business works. This is one of the reasons why they are always asking for salary rise or living in the wish of passive income. (Passive income is a myth , by the way) . Meanwhile I don’t say that asking for pay rise is bad. No, I do even appreciate it if one can obviously see the value added to business vs. salary he/she gets. Therefore decided to walk through the value creation for a company and then to link it to individuals impact in this whole process.

I want to help people to control their lives themselves, not, to let it to be controlled by some managers at companies they are employed by.

I’ll start from big to small. From top to down. So that it is easier for us to see the big picture of value creation and then to navigate our individual cases.

Lets start to talk about VAT (Value Added Tax). It is one of the most popular types of taxes available in the world. There is reason behind it. It stays exactly on the basis of explanation how economy functions. Each business sources raw materials/services and while working over them sells them with more value than cumulative cost of raw materials. The difference between those two creates base for tax. This also shows how much additional value is generated in economy. It is the base for GDP (Gross Domestic Product). GDP shows final total value of product and services in economy. So, GDP consists of several value generation chains by each and every individual in economy. Each adding up value on the previous one. So once final product is consumed all of the businesses in the chain are being rewarded. More companies in the chain , is better. More they can add value it is better for GDP.

If you ask which is better : More companies in chain or more value per chain element ?

lets analyze it

Perhaps it if we just ignore realities of todays world, one would say that more value per chain element is better, but, taking into the account globalization and fierce competition rules specialization is a MUST. So if every step of production is serviced by the best specialized company then final product will be at much higher price than few guys get from raw materials to end product.

Here we have to mention that we have to aware of mediums between ready product and their customers. Those mediums are not changing the product or service but take advantage of information dis-balance or economy of scale to benefit from transportation and sales/distribution activities. Those additional chains elements increase GDP, but, in fact does not really show effective GDP production of country. We cannot live without trade mediums, but, we have be aware that sales and marketing activities are adding value to final product and customers have to pay for it anyhow.

Lets go through an example:

Imagine we have bought a painting board, a box of colors and some painting tools. Paid total of 5O USD for all of them. Now we used our skills and created a nice painting. Started to showing this painting to our friends and one of them offered us 200 USD to get it. It is sold now!

Now, we will get an added value of 150 USD as value into the economy. This 150 USD will be added up to the GDP increase of country. It is the base for YOUR VAT tax. This is the outcome of your VALUE CREATION ENGINE. Bigger it is better it is. So, best engine is the one which creates more value without less petrol (investments, operational costs) put inside. Companies which generate more value with less resources are the ones to stay for longer in economy.

So, if we want to earn money we have to put “something” on top of existing raw product and services so that end customer is happy to pay extra for it. It is as simple it is. Now lets get down to employee perspective to understand base for his/her pay.

Companies employ people to do the job within the company to make final product/service. So if your company generates 150 USD as total VAT base, you as an employee has a part in it. Of course, it can be hard to evaluate exact value amount created by an individual employee, but you can try different methods to evaluate your added value. (like, how much you would get if you do your part of job yourself as separate entity and service companies) You should also account added value of company itself as marketing, access to resources, access to network and many other. To answer this question you have to ask this question to yourself :

If the same employees will leave their current job and start the same sort of company at the same market, how much extra costs you will need to get to the same level as your current company?

Now, if you deduct the amount of costs from total value creation potential of your company(say, yearly sales of company) you can estimate your value within the company. Of course, those calculations are trivial and considering that economy is not closed model, it might not well represented, but still it is a good exercise to help you to judge about your added value.

Now, you can estimate how much value you can create for your company. There is another dimension you have to understand now. Supply and demand of your skill in the market. Basically, how rare are the people in the economy with your skills and how much it is demand for this role?

For example, role of cashier has high supply (since not much skills are required) and but the demand is limited. Obviously companies will enjoy negotiation power here and get better pay rates, even times, substantially less than value created within the company. But, if you talk about designer who is specialized in high floor buildings, it is rare skill, and once a company needs such a skill, the price goes high. Demand is high, created value is high, negotiation power is on employees side. So here candidates can enjoy better rates.

A small summary

If you are to select speciality or learn skills, go for high value creating and the one with limited supply in the market where as demand goes up every day. Similar situation already exists in our markets with Data scientists. It is a skilled profession and it takes quite a time for one to grow here. Demand is exponential and therefore Those people can get higher pays within the value creation chain of company. You can figure it our by investigating trends and potential demands for future.

If you have skill for which there is high supply, don’t worry. There is way out. Understand how your company generates value. See how much you, yourself take part in this equation. Try to figure out , how much it will cost to replace you with someone else with the same skills. This will give you an idea about your position defendability. Also, try to improve your current value addition into the company and become more than who you are. You have to understand how your company generates value to be able to improve your part. Unfortunately most people does not understand it. Or, you can go for specialization upgrade and make extra effort to educate yourself to the more value add. I do advice it to anyone. Consistently work over your skills and qualities. Improve yourself. Make 2.0, 3.0 and so on version of yourself every day, year/

You can write me over twitter and comment if you find it interesting to discuss it.

Twitter – @imranbaghirov

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