Red alert: math problem ahead.

Look at your numbers. Gather up the following:

1. Total revenues for 2009.

2. Total revenues for 2010.

3. Total payroll for 2009.

4. Total payroll for 2010.

Then divide payroll by revenues (PAYROLL/REVENUES) for both years. That’s two separate calculations.

For instance, if 2009 payroll was $450,000 and 2009 revenues were $2,000,000, the result is 0.225. That means that 22.5% of revenues were allocated to payroll.

Let’s say that for 2010, your payroll went up to $500,000 and revenues held steady at $2,000,000. Now the result is 0.25, or 25%.

That’s not a good scenario. That means we spent an additional 2.5%, or $50,000, for payroll in 2010 over 2009.

That shouldn’t happen.

“Why not?” you ask? You argue that you’ve got good people, and they deserve a raise after working so hard. You increased salaries, and payroll went up. It’s normal, right?

Here’s the deal: you should only pay additional money if you’re getting additional results.

If your people—combined—produce the work for $2,000,000 in revenues, they should get a certain amount in compensation. If the top line stays the same—$2,000,000 in our example—you’ve got to keep the payroll at the same level; otherwise, you’re heading in the wrong direction.

You should, however, be giving raises. But only if the people you’re paying more are producing more. They don’t get raises for sticking around and doing the same thing. They get raises for experience. With experience comes an increase in productivity. They should be increasingly more efficient because of their experience. If that’s not happening, you should start exploring the reason for that failure.

If it’s not happening—if they aren’t growing—you’ve got to figure out whether it’s them or you. Is it that you’ve got the wrong people or that you aren’t teaching, training, and giving people room for growth?

If your people improve, they’re going to earn more. But what about cost-of-living increases for people who perform exactly the same from year to year? Okay, okay, I’m not the Grinch who stole Christmas. Cost of living increases are fine, but we aren’t experiencing huge increases in the cost of living lately, so cost-of-living raises, if any, should be tiny and should correspond with an increase in your pricing.

However, I’ve got to ask that if you have an employee who doesn’t improve from year to year and isn’t driving up your revenue, aren’t you sort of wasting an opportunity? Shouldn’t you have someone in that chair who’s willing and able to grow? Shouldn’t you be spending your management time helping someone with more potential?

From a macroeconomic standpoint, the US economy has recently lost 20 million jobs. Many of those jobs aren’t coming back. Why? Because businesses have figured out ways to improve productivity and reduce headcount.

Are you reaping the benefits of those productivity improvements? You should be.

You expect yourself to get better and better each year. You keep learning, you keep improving, and you’re worth more as the weeks pass. Shouldn’t everyone on your team be doing the same?