33. What should I pay my first employee?

Here’s today’s letter:

I’m finally doing it! I’m starting my own business. Things are going better than expected and I’ll need to hire people soon. What should I pay?

First of all, congratulations on your new business! Small businesses are incredibly important for our economy- almost half of Americans work at a small business, that’s 47% of Americans according to the Small Business Administration. So creating a job is huge.

The fact that you’re even thinking about being an ethical employer this early in the game is a great sign. I think there can be a tendency when starting out to shave margins as low as humanly possible. No judgment on that, people have their reasons and circumstances, but it’s a great approach to build your business from the beginning with the foundation of ethical treatment of employees that you want. That can go for the other decisions you make with your business as well such as the environmental impact or supplier diversity.

When we think about employee pay, I think we need to start with an agreement on what a living wage is, and then to think about any additional pay you offer on top of that, depending on the job. Because some jobs require specialized skills or experience, certifications, degrees, a certain temperament that just isn’t easy to find. It just depends.

So let’s start with what I’m calling the base pay, or is more commonly called a living wage. There’s a simple but robust living wage calculator that was created by Dr. Amy Glasmeier at MIT 15 years ago and is still updated and used in national policy discussions. You can find it at livingwage.mit.edu

What this living wage calculator does is to take a look at all of the basic expenses needed to be able to survive without going on to public assistance or experiencing frequent housing and food insecurity. The categories of expenses that are included are:

Groceries
Housing
Medical
Transportation
Childcare
Broadband Internet
Civic Activities

Let’s break those down.

Groceries includes only raw ingredients found at the grocery store. Absolutely no pre-cooked meals. Absolutely no meals or snacks eaten outside of the home.

Housing also very basic. A studio apartment for a single individual. In a two adult household with two kids, they would rent a two bedroom apartment. One bedroom for the adults and one bedroom for the kids.

Medical includes monthly fees for insurance, prescriptions, and medical supplies.

Transportation: hopefully this person already has a car because the cost of purchasing a vehicle isn’t included, only the costs to maintain it and fuel it, as well as public transportation.
Childcare assumes that the family chooses the absolute cheapest provider in their area.
Internet and Cell Phone includes some bare bones estimates. Buying a $200 phone every 3 years, getting cell service for about $40/month.

Civic Activities is a tiny amount of money to be used for things like books or movie tickets.
Also there is a bucket for taxes.

Let’s note what ISN’T included in this living wage. Not a single meal eaten outside of the home and not even a precooked meal from a grocery store. Not a single unpaid day off work. Not a single road trip or other vacation. But maybe the most alarming realization is that a living wage doesn’t even include a single dollar to go towards savings or investments or buying a home.

When you add up these super basic needs- the groceries, housing, medical, transportation, childcare, Internet, Civic Activities and taxes, you get a dollar amount. And the tool gives you that dollar amount depending on the household size- are you hiring a single adult with 0 children? Are you hiring a single parent? The tool also breaks it down by geographical area. So let’s look at a few examples. Let’s start with Washington DC. A single person with 0 children would need to make $42,000 a year to hopefully avoid needing public assistance. And I cannot stress enough how tight these expenses are. For this single person with 0 kids in DC, for example, the grocery budget is only $260/month. The rent they are assuming for this single person with 0 kids is a studio apartment at only $1,460 a month. In Washington DC that is going to be a very difficult find. So anyway you add up all of these bare bones expenses and you get an annual living wage of $42k. If you add a child, that comes to $80k a year. Remember, this is riding that line right above poverty, right above the point where you will probably have to apply for public assistance.

You can use the tool to look anywhere in the country. Oakland California? A single person with 0 kids needs to make $45k before taxes.

Maybe you’re not located in a high cost of living city. Maybe you are in Wichita Kansas, in that case a single person with 0 kids would still need to clear about $28k before taxes. Add a kid to the equation and that becomes almost $59k.
So take a look at the tool, get a sense for what the base pay would be for a living wage, and then think about the role you are hiring for and the values you are trying to build into the foundation of your company as you create it.

I also want to encourage you to think about how you can provide health care- fully half of Americans have medical debt, most of which is driven by diagnostic tests, hospitalizations and emergency room visits. So do consider that as one way you can be an ethical employer.

And then, you might find a few suggestions as well in Episode 15, which was called Housekeeping and Other Dirty Secrets.

Please stay in touch and let me know how you decide to tackle building an ethical company, and congrats again.

Link from today's discussion:
https://livingwage.mit.edu/