Higher Compensation to Add Talent in a Tight Market
Posted Sunday, July 1st, 2018

Higher Compensation in a Tight Market

What are the Options in a Tight Market?

Maybe in  market with a significant supply of talent, some employers can “get away” with paying a lower than market compensation.  That is not the case in a tight job market. The current low unemployment rate has resulted in the demand for critical talent outstripping the supply. Normally, qualified candidates come from one of two populations which are: The unemployed candidate and the employed candidate. With the limited supply of talent, there are very few qualified unemployed candidates. This means that most qualified candidates are actively holding a job. They have less urgency to need a new job, are getting paid market price and focused on their day job with little free time available to consider a new job. They might consider leaving their current job for a new job once they are convinced that their new job is better for them than their current job. “Better” might be defined by having a better job title, more responsibility, opportunity for advancement, etc. The common measurement for “better” is usually as simple as more compensation.

The options to attract and hire talent in a tight market are limited. Compensation is an important part of hiring. (Please Click) The employer can obviously raise the compensation, offer some type of new employee spiff, maybe offer an attractive title, etc. In reality, the options are limited to attract “already employed talent”.

Finding the right solution is complicated. Let’s review the challenges.

Just Pay Employees More! It’s Easy to Solve This.

It is easy to just pay employees more. After all, one aspect of a tight hiring market is that the economy is humming along and business is good. Good economy usually means more revenue and higher profits for businesses which allows them to afford to pay higher compensation as long as the economic factors remain favorable.

No! Not so fast…. The reality is that when you hire new talent at a rate that is 5-10% higher then what you have already established as the baseline for current employees who have the same role, you have a compensation correction issue. On one hand you could wait until the current employees find out that the newly hired talent is getting paid more than the current employees are making, (and the current employees will find out sooner or later), OR you could raise the compensation of the current employees to be at the same level as the newly hired employee. Now things are getting complicated.

For example, let’s say the newly hired talent will be making $150K per year and the current five other employees who have the same role are each making $136K. Raising up each of their compensation by about 10% would cost their employer $14K x 5 = $70K per year. Can that company really justify adding $70K of additional compensation expense in order to hire one new person at $150K? Any business out there will tell you that this decision makes little to no financial sense.

It is the Economy

The same current economic factors that have driven the demand up and the supply down for new talent will also shift at some point when the supply will be strong and the demand for new talent will be weak. Once the demand for new talent softens as a part of fiscal belt tightening by companies, those who were earning above market compensation will be too expensive for their employer and will be “laid-off”.

While we can look at year over year economic trends and clearly see that the economy goes up and down, I have not met any business professionals who are comfortable being paid less this year than they earned last year just because they economy softened. There is no easy compensation model that can be tied directly to the economy.

What is the Solution?

Finding the right solution is the hard part. Ideally, when business is booming, companies should be positioned to pay more to add critical talent…..until the bubble bursts and the economy slows down where business are making less and they need to pay their employees less.

There is no practical working model that pays employees more in really good times and pays less in really bad times. Understanding this is the first half of finding a solution.

One partial compensation solution could be to establish a rewards based / performance based bonus model where the achievement of specific goals drives the payment of a predefined bonus amount. It may be possible to develop bonus payment amounts that can somehow deliver a higher reward during stronger economic periods and a lower reward during weaker economic times. (Please Click for Business Growth Column)

The solution is also recognizing that nothing is more complicated and more complex than the people working in your business and the people who you want to add to your business.


Good Hunting!


To contact Boxwood Strategies, please click here.