Compensation Trends

On the surface, trends in compensation have not been dramatic in the last few years. Merit budgets have consistently been in the 5% range and inflation has been low. However, beneath the surface a few trends are emerging. This essay will comment on two of the trends:

The narrowing pay gap between experienced and inexperienced workers, and
The widening gap in pay practices between companies.

The narrowing Gap between Experienced and Inexperienced Workers

Salaries surveys show that the average start rates among college graduates have been increasing significantly in the past few years, well into the double-digit rates. At the same time, merit budgets and salary growth have generally been 5% or less. With the salaries of inexperienced workers growing faster than experienced workers, the gap between them is decreasing.

Several factors are reinforcing this trend. One is a shortage of skilled workers, especially those with technical skills. Colleges provide an obvious pool of skilled workers, so competition to hire college students is pushing up the college hire rates. Despite the increasing college hire rates, new college graduates are still attractive to employers, because the cost of hiring new college graduates is still less than experienced workers. In addition, college students are attractive to employers because they typically have the most current skills, whereas those trained 20 or more years ago may not have current skills.

This leads to the next factor influencing this trend. Twenty-something (Generation X) employees consider experience to have less value than do the experienced employees. If the less experienced employees perceive that they are contributing as much to the organization as a more experienced employee, they expect to be paid similarly. The argument that experience has an inherent value does not fly as well today. Part of this is rooted in the attitude, "I want it all now." Another part (the larger part) is based on the fact that new college hires actually are contributing to organizations more quickly.

Twenty years ago, the common rule of thumb was that college hires were an investment in the future. The payback would typically begin after they gained five years of experience. At that point their skills would be at a level such that they could contribute to the organization. Today many new college grads are contributing almost immediately. The new college graduates expect that they will contribute immediately, and this expectation is now shared by management

Other factors that reinforce this change are the rapid change in technology which puts a premium on recently acquired skills. Also organizations have changed by flattening their structures and opening communication. This shortens the time it takes to "learn the ropes" and "know the players" or perhaps even eliminates the need. The culture of organizations are changing into more of a "team" environment where all employees contributions are valued. This philosophy tends to push salaries together.

The Widening Gap in Pay Practices

The gap in pay practices is widening between companies, even those within the same geographical region. This is especially true for less skilled positions. This trend is exhibited in salary surveys by the growing spread between the average low salary and the average high salary. Among assemblers, technicians, and clerical workers, the spread has grown by as much as 30% in the past four years.

The low salaries are staying low, because the demand for less skilled workers has not expanded greatly (it has shrunk in some locations). Thus there is no great market pressure to increase the pay. In addition, global competition is keeping pay increases low.

At some companies though, the pay of less skilled workers has grown. Companies that have increased the pay of these employees tend to have a relatively large population of skilled employees. The "team" culture mentioned above, wherein all employees' contributions are valued, tends to encourage the growth of all employees' pay.

Conclusions

The changes are an outgrowth of market pressures and changing organizational cultures. Are these changes good or bad? I believe they are generally good. That communication is opening and that more employees have opportunities to provide significant contributions will result in an increase in productivity. That the gap in pay rates among the less skilled workers is widening, is not all bad. It will help keep some of those jobs in the U.S. market and provide greater opportunities for unskilled individuals to enter semi-skilled positions.

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