Saturday, December 15, 2012

How to Figure Out Your Worth to a Company

Companies need profits in order to continue operating. At the bare minimum, cash coming in must equal cash going out.

Perverse form of state capitalism S'pore style in which the state has open the floodgates to hordes of cheaper foreign workers to boost profits of state owned companies has led to depressed/stagnant salaries as well as loss of skills/experience when locals are displaced.

Workers not in cashing generating job roles are more at risk as these workers are considered as costs/expenses by the company. Even for workers bringing in the cash, they have to make sure that the amount of $$ they bring in justify their salaries.

Let's take example of a company selling kids shoes -Kiddy shoes
  • Raw material to make kiddy shoes $3
  • Assembles raw materials into shoes $4
  • Transport shoes to retailers $1.50
Total: $8.50

Retailer buy shoes at $22.50 thus Kiddy Shoes company makes $14/shoe profit. This $14 is gross margin. This is how much Kiddy Shoes Company earn after raw materials, assembly & transportation.

Then salaries need to be paid. Surpose a sales executive in Kiddy Shoes Company has salary of $4,000. As the company has 62% ($14 out of $22.50) as its gross margin, it has to generate $6,429 ($4000 divided by 0.622) in sales.

Companies have to cover more than salaries alone. There's medical, dental, employer retirement contribution, annual leave, maternity/paternity leave etc. Typical the extra costs range from 17 to 50% of salary. Let's assume Kiddy Shoes has to fork out an extra 25% of salary for worker benefits.

$4000 Salary
+ $1000 (25% extra of salary for worker benefits)
$5000 is what Kiddy Shoes must fork out to pay sales executive.

All cash to pay salary comes from customers & not from your boss. I know some boss are a pain in the ass & i've experienced them too. For $5000, the company has to sell $8038 ($5000 divided by 0.622 gross margin) worth of shoes. Hence the sales executive has $8038 as sales target to keep his/her job.

Those workers earning $4000 in supporting/backend roles need to find a way (much harder to do) to justify saving/contributing $8038 to keep their jobs which is why many bosses view them as costs/expenses.

As a rule of thumb, many employers assume 2x additional sales of salary to justify the person's salary. Thus, $96,000 in extra sales needed to cover full costs of employee with salary of $48,000/year.

Depending on industry and/or gross margin, it might be 3x instead of 2x.

Of course the above is just a simple way of justifying salaries but it provides a good sense of how to determine a worker's worth & salaries/fees.

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