Wondering how much the new hire is making? Answer: 7% more than you.
How long have you been working for your current employer?
If your answer is a few months, congratulations. You have nothing to worry about. But if you’ve been at your company for more than a year, here’s something your manager doesn’t want to tell you: You’re probably underpaid.
Over the past year, the red-hot job market has forced employers to pay hefty paychecks to lure in new candidates—and it has created a deep chasm between rookies and veterans at companies across America. LaborIQ, a compensation data provider, estimates that salaries for new employees are 7% higher on average, higher than the average salary for those already employed in similar positions. For many demanding businesses in tech and finance, inequality is in the double digits. In great resignations, longtime employees – who have been mired in good and bad times – are paying a secret tax for their loyalty.
The employees are starting to catch up. They are bombarding their employers with demands for wage increases. Or they are moving to new, better-paying jobs, depriving companies of the people with the most institutional knowledge. Human-resources departments know they need to do something about it, but the only real solution is costly: raise everyone’s pay to match the runaway pay. This would be hard to do, especially with the budget already exhausted by the cost of recruiting new talent. The more you pay the new ones, the less you have left to pay the old ones.
Some companies are trying to address the huge disparity between job-seekers and job-changers. Some are taking out midyear bonuses to try to keep employees from looking elsewhere. Others are raising company-wide pay — Microsoft announced last week that it was nearly doubling its payroll budget starting in September and taking big hikes. But many employers are choosing a cheaper route: hoping to quell dissent in silence.
“Almost every company is dealing with this dynamic in some way or another,” Jay Denton, chief labor market analyst at LaborIQ, told me. “Companies are struggling across the board. They are playing catch-up.”
job changers vs job seekers
This isn’t the first time a booming job market has distorted salaries within companies. Compensation professionals have a confusing name for dynamic. They call it salary compression, the way the pay gap between those with more experience and those with less is narrowed in the company. Compression is bad because generally speaking veterans should be paid more than newbies given that they have already proven themselves and are bullish on the way their company operates. When the traditional pay range changes — when newcomers get paid more than longtime employees in similar roles — experts call it pay inversion.
The Atlanta Fed tracks the wages of those who have remained in their jobs and who have made the switch, and this makes it possible to track the pay reversals in action during the past two decades. In recessions, job-seekers fare better than job-changers, reflecting the fact that changing jobs is often involuntary during bad times – people are laid off and no one else but to take low-paying roles. There is no option. In detail, it’s the opposite – job switchers come out on top. This is what is happening now. Salaries for job changers in April increased by 5.6 per cent compared to a year ago, compared to 4.2 per cent for those who were employed. This difference of 1.4 percentage points is the biggest since the dot-com bubble in 2001. In fact, it’s so big that changing employers can make a difference in whether your pay is keeping up with inflation. In the first quarter of this year, the Fed’s preferred gauge for prices rose 5.2%.
If you’re one of the job seekers, you probably want to know how much money you’re leaving on the table. LaborIQ tracks average salaries for approximately 20,000 job titles and then calculates what companies need to offer to recruit new employees in today’s job market, adjusted for each particular job and location. Nationally, the difference between those two numbers is 7%. But that difference varies widely depending on the job. LaborIQ analyst Denton told me that the disparity in tech and finance was particularly large, with competition for talent being particularly fierce.
I asked Denton and his colleagues to pull together a sample of job titles in tech with particularly large gaps. He told me that the national median salary for IT managers is $116,243. But LaborIQ calculated that companies need to offer $139,313 for new IT managers — a difference of 20%. The difference is 14% for systems analyst programmers, 13% for database developers, and 11% for information security engineers and directors of data science. The difference also varies widely among major cities. For IT managers, the gap is 10% in Salt Lake City, 20% in San Francisco, and 22% in Austin, Texas.
Employers may expect to keep their staff members in the dark about pay discrepancies, but the secret is already out. Employees talk to each other, and they search salary information sites like Glassdoor, Salary.com, Levels.fyi, and Blind. And increasingly, as I wrote about last year, governments are requiring employers to list salary categories in their job postings. “When those roles are posted with pay, people are like, ‘Wait a second, I have that job,'” Denton said.
That knowledge has given rise to all kinds of troubles. Long working employees are angry. Morale has plummeted. And the exodus has skyrocketed: In March, a record 4.5 million Americans quit their jobs. Now, inflation is turning even more jobseekers into job changers, as rising prices force people to look for the pay bump that comes with a new position.
Employers know they have a problem. In a recent survey conducted by staffing firm Robert Half, 56% of C-Suite executives admitted that there are pay discrepancies between new and existing staff members. Of them, nearly two-thirds said they were planning to conduct regular wage audits and adjust wages to close the gap. But even the most diligent employers typically conduct audits just once a year. In this economy, Denton told me, wages are rising so rapidly that employers will need to review and adjust wages for existing employees as often as a quarter. If they don’t, they risk losing even more talent.
Payscale, which provides compensation data to employers, recently ran an audit to see what its 600 employees can earn in the current job market. “We were concerned about our current employees, who have been with us during that tenure,” head of people, Lexi Clark, told me. “We want to make sure that what we are offering externally in the market and our current staff matches.” Clark said that as a result of the audit, employees received pay increases of 3% to 20% — “substantially” compared to previous years. The pay adjustments helped ease the business on Payscale, which was growing. Going forward, the company hopes to quickly identify and correct any disparities before they get out of control.
Picks, Stock Rewards, Fancy Trips
Microsoft is another company that is taking big steps to increase salaries. Last week, CEO Satya Nadella told employees that Microsoft would increase pay for high performers and distribute more stock grants starting in September. The move was meant to deter employees from jumping ship — especially for Amazon, a competitor that recently more than doubled its maximum base salary to $350,000.
Microsoft has deep pockets to offer dramatic increases in compensation — it’s nearly doubling its budget for current payroll and quadruple its stock awards. But other companies have been forced to get creative. “We’ve seen organizations really limit their thinking and see what they can do to prevent employees from jumping elsewhere,” Don Fay, a senior district president at Robert Half, told me. Some are offering lump sum bonus. Others are offering rewards for high performance, including fancy trips, tuition reimbursement, and gym memberships. “All those kinds of things are being looked at now more than ever before,” Fay said.
Pay disparity, by metropolitan area
To see the pay intervals for different jobs, click on the menu and then hover over the map:
IT Coordinator IT Director IT Manager System Analyst Programmer Database Developer Data Management System Coordinator Data Scientist Data Science Director Software Development Engineer Software Development Manager
So what does all this mean for job seekers who don’t want to miss out on the pay frenzy? Changing jobs is the most obvious option. But searching for a job is a pain and full of uncertainty. To get a pay raise, employees may not need to look elsewhere. The first step is to determine how low their salary is compared to the job market and then use that information to negotiate an increase. In great resignations, employers have never been more desperate for staff members to stay—which means they’re more open to bargaining on salaries than ever before.
As far as job changers who have taken advantage of great resignations for big pay increases, being overpaid has its own risks. Right now, the national layoff rate is hovering near a record low. But if a recession strikes — and a recent drop in stock prices could signal that a shortfall is taking place — workers with large salaries will be most vulnerable to layoffs. For job seekers, knowing they have a little more job security can offer a measure of solace.
Ideally, however, the gap between job seekers and those who switch will not open at all, no matter how hot the job market is. If the market is paying more for certain positions, companies should pay the same salary to their existing employees. Years ago, Netflix decided that it shouldn’t wait for good employees to be hunted down by rivals — it should pay its employees more consistently than they can make elsewhere. The best employees were rewarded for their loyalty, not punished for being around.
Now, prompted by the great resignation, a growing number of companies are being forced to take the same approach, conducting frequent wage audits of existing employees’ salaries to keep up with the market. It’s a clever move – sure to boost morale, improve performance, and reduce turnover. After all, if a company automatically pays its valued employees what the market demands, talented employees have no financial incentive to go looking for a new job. They know that salary is already greener on the edge of the fence.
Aki Ito is a senior correspondent at Insider.
