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 you to know: You’re probably underpaid.
Over the past year, the red-hot job market has forced employers to dole out huge paychecks to lure new candidates — and that’s created a deep divide between the rookies and the veterans at companies across the US. LaborIQ, a compensation data provider, estimates that salaries for new hires are 7% higher, on average, than the median pay for people already employed in similar positions. For many in-demand occupations across tech and finance, the disparity is in the double digits. In the Great Resignation, longtime employees — the ones who have stuck around through good times and bad — are paying a secret tax for their loyalty.
Employees are starting to catch on† They’re bombarding their employers with demands for raises. Or they’re leaving for 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 expensive: Raise everyone’s pay to match the runaway salaries. It’d be tough to do, especially with budgets already depleted by the cost of recruiting fresh talent. The more you pay the newbies, the less you’ve got left to pay the old-timers.
A few companies are trying to even out the steep disparity between job stayers and job switchers. Some are doling out midyear bonuses to try to keep workers from looking elsewhere. Others are increasing salaries company-wide — Microsoft announced last week that it’s nearly doubling its payroll budget and handing out bigger raises, starting in September. But many employers are opting for a cheaper path: hoping to ride out the disgruntlement in silence.
“Almost every company out there is in one way or another having to deal with this dynamic,” Jay Denton, the chief labor market analyst at LaborIQ, told me. “Companies are struggling across the board. They’re playing catch-up.”
Job switchers vs. job stayers
This isn’t the first time a booming job market has distorted salaries within companies. Compensation professionals have a confusing name for the dynamic. They call it salary compression, referring to the way the pay gap narrows between those with more experience at a company and those with less. Compression is bad because veterans, generally speaking, should get paid more than newbies, given that they’ve already proved themselves and are up to speed with the way their company works. When traditional salary ranges flip — when newcomers get paid more than longtime employees in similar roles — experts call it salary inversion.
The Atlanta Fed tracks the wages of those who have stayed in their jobs versus those who’ve switched, and that makes it possible to track salary inversion in action during the past two decades. In recessions, job stayers fare better than job switchers, reflecting the fact that the job switching during bad times is often involuntary — people are laid off and have no choice but to take lower-paying roles. In expansions, it’s the opposite — job switchers come out on top. That’s what’s happening now. In April, the wages of job switchers rose 5.6% from a year earlier, compared with a 4.2% increase for job stayers. That difference of 1.4 percentage points is the biggest since the dot-com bubble in 2001. It’s so big, in fact, that switching employers makes all the difference in whether your pay has kept 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 stayers, what you probably want to know is how much money you’re leaving on the table. LaborIQ keeps track of median pay for about 20,000 job titles and then calculates what companies need to offer to recruit new hires in today’s job market, adjusted for each particular job and location. Nationally, the difference between those two numbers is 7%. But that gap ranges widely depending on the job. Denton, LaborIQ’s analyst, told me the disparity had been particularly large in tech and finance, in which competition for talent has been especially fierce.
I asked Denton and his colleagues to pull a sample of job titles in tech with particularly large gaps. The national median salary for IT managers, they told me, is $116,243. But LaborIQ calculates that companies need to offer $139,313 for new IT managers — a gap of 20%. The gap is 14% for systems analyst programmers, 13% for database developers, and 11% for information security engineers and directors of data science. The gaps vary widely across major cities as well. For IT managers, the gap is 10% in Salt Lake City, 20% in San Francisco, and 22% in Austin, Texas.
Employers may hope to keep their staff members in the dark about the pay discrepancies, but the secret is already out. Employees talk to one another, and they scour sites that offer salary information, like Glassdoor, Salary.com, Levels.fyi, and Blind. And increasingly, as I wrote about last year, governments are requiring employers to list pay ranges in their job postings. “When those roles get posted with what the salaries are, people are like, ‘Wait a second, I have that job,'” Denton said.
That knowledge has led to all kinds of trouble† Longtime employees are disgruntled. Morale has plummeted. And attrition has skyrocketed: In March, a record 4.5 million Americans quit their job. Now, inflation is turning even more job stayers into job switchers, as rising prices have forced people to seek the pay bump that comes with a new position.
Employers know they’ve got a problem. In a recent survey conducted by the staffing firm Robert Half, 56% of C-suite executives acknowledged having pay discrepancies between new and existing staff members. Of those, nearly two-thirds said they were planning to conduct regular pay audits and adjust salaries to close the gaps. But even the most diligent employers typically run audits just once a year. In this economy, Denton told me, salaries are going up so fast that employers would probably need to review and adjust salaries for existing employees as often as once a quarter. If they don’t, they risk losing even more talent.
Payscale, which provides compensation data to employers, recently ran an audit of what its 600 employees could earn in the current job market. “We were worried about our current employees, who have been with us through whatever that tenure might be,” Lexi Clarke, the head of people, told me. “We want to make sure that the offers we’re making externally in the market and our current employees match up.” As a result of the audit, employees received pay bumps of 3% to 20% — “substantially” bigger than in previous years, Clarke said. The salary adjustments helped reduce turnover at Payscale, which had been on the rise. Going forward, the company hopes to identify and address any disparities quickly, before they spiral out of control.
Raises, stock awards, fancy trips
Microsoft is another company that’s taking big steps to boost pay. Last week, CEO Satya Nadella told employees that Microsoft would increase salaries for high performers and dole out more stock grants, starting in September. The moves were meant to stop employees from jumping ship — especially to Amazon, a competitor that recently more than doubled its maximum base salary to $350,000.
Microsoft has the deep pockets to offer dramatic hikes in compensation — it’s nearly doubling its budget for existing payroll and quadrupling its stock awards. But other companies have been forced to get creative. “We’ve seen organizations really put their thinking caps on and see what they can do in order to keep employees from jumping somewhere else where they could potentially get more compensation,” Dawn Fay, a senior district president at Robert Half, told me. Some are offering one time bonuses. Others are handing out rewards for high performance, including fancy trips, tuition reimbursement, and gym memberships. “All of those types of things are being looked at right now more so than they ever have,” Fay said.
So what does all this mean for job stayers who don’t want to miss out on the salary frenzy? Switching jobs is the most obvious option. But conducting a job search is a pain and is fraught with uncertainty. To get the pay bump they want, employees might not need to look elsewhere. The first step is to determine how far their salary falls short compared with the job market and then use that information to negotiate a raise. In the Great Resignation, employers have never been more desperate to get staff members to stay — which means they’re more open to haggling over salaries than they have been in the past.
As for the job switchers who have leveraged the Great Resignation to get big salary increases, being overpaid comes with its own risks. Right now, the national layoff rate is hovering near record lows. But if a
hits — and the recent slide in stock prices may indicate that one is looming — employees with outsize salaries will be the most vulnerable to layoffs. For the job stayers, knowing they have a bit more job security might offer a measure of consolation.
Ideally, though, gaps between job stayers and switchers wouldn’t open up at all, no matter how hot the job market gets. If the market is paying more for certain positions, then companies should offer that same pay to their existing employees. years ago,
decided it shouldn’t wait for good employees to be poached by competitors before offering them a raise — it should proactively pay its workers what they could make elsewhere. The best employees were rewarded for their loyalty, not penalized for sticking around.
Now, spurred by the Great Resignation, a growing number of companies are being forced to take the same approach, conducting frequent pay audits to ensure the salaries of existing workers keep up with the market. It’s a smart move — one sure to boost morale, improve performance, and reduce turnover. After all, if a company automatically pays its valued employees what the market demands, then talented staffers have no financial incentive to go looking for a new job. They know the pay is already greener on their side of the fence.
Aki Itoz is a senior correspondent at Insider.