The Compensation Conversation: Market Trends and Data

Last week, we started a conversation centered around compensation and today’s current labor market. You may get to the offer stage of the hiring process, just to find out that the compensation expectations of your all-star candidate are staggeringly different than what you as the hiring manager were prepared to extend. You end up losing out on your best candidate and needing to start from scratch to make a hire, costing more money in the long run.

There are a whole host of reasons why this can happen, the first being that neither the client nor the candidate were open, honest, and up-front in discussing compensation at the start of the process. Two other core themes are also common: Misaligned company salary structures and executives with a “head in the sand” approach to market pay.

market rates

A huge problem: Many companies operate with salary structures that are outdated and likely far out of touch with actual pay rates being offered in the comparable labor market. This is becoming even more common in today’s labor market conditions. Market salaries for key positions are rising at rates not seen in nearly two decades, primarily driven by hiring demand and pay rates for new hires.

When a company has a salary planning budget of 2.5% while external rates for new hires may be rising at 10% or more, it doesn’t take long until we’re paying our staff way below what they could earn by changing jobs. We’ve basically insulated ourselves from the external labor market, holding pay rates down by relying on outdated compensation structures and a laughable 2.5% “merit increase” budget. Insane.

The Atlanta Federal Reserve noted in May 2018 that “job-switchers” received a pay increase roughly 30% higher than workers who stayed put for the last 12 months. Let’s see – stay put for the next year or find a new job and probably get a salary increase of around 30%. Hmmm…tough call, right?

Think about that for a minute and you’ll begin to recognize the magnitude of this issue. People are quitting their jobs at near-record levels – 3.4 million workers left jobs in April 2018 alone. Who can blame them? Hey, Sally is “engaged” at her company, her boss is great, and that new doggie-day-care center is awesome – but we’re talking 30% increases here.

A closely related reason is that hiring managers and HR are simply “used to” paying engineers what we pay engineers here. It simply does not occur to them that we’re paying our people potentially 30% or more below market rates for talented engineers. Then, we try to hire Super Sally and begin to realize the problem and it’s a whopper. We’ve ignored pay rates for the last 10 years, and that bill is now due.

The only sustainable solution requires reevaluating internal pay structures based on external labor market pay rates, with the result that we’ll need to implement huge equity adjustments across entire job families to correct the problem. We’re talking perhaps 20-25% immediate equity increases for the entire engineering team just to get everyone back in line with the market, and adopting salary planning budgets in the 8-10% range until market conditions cool down. And that’s just a well-informed estimate.

We have only ourselves to blame; laser-focused on next quarter’s numbers and holding down pay rates for at least 10 years while ignoring external market conditions. Wait, how can we blame executives? Their bonus is on the line here! Keeping labor costs down makes every quarter look better – and that seven-figure bonus is awesome! Crazy idea: Base 50% of executive bonuses on employee retention, turnover rates and recruiting effectiveness and see what happens.

We can easily address this issue by putting our cards on the table at the outset, and being transparent with candidates about earnings expectations, bonus, benefits, and relocation throughout the process.

If we end up with a Super Sally situation, it’s because we failed to do this by dancing around the compensation issue with the (often false) expectation that we’re a leading employer, we’re a market leader in pay rates, and candidates would do anything to work for us.

I’m betting that there’s at least a 30% chance that you’re wrong (see what I did there?).

Be open, be real, and be effective!

Other resources:
https://www.forbes.com/sites/adp/2017/12/03/using-compensation-data-to-keep-your-star-employees/#9041e5f1123c
https://www.wsj.com/articles/in-this-economy-quitters-are-winning-1530702001

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