Salary compression

Why are companies willing to spend so much on hiring new employees but on retaining them?
Written by Shikhar on Reddit

I got a big pay raise, but it didn’t make me feel good. In fact, it made me realise that I had been leaving money on the table for a while.

I would never have got that raise unless I fought for it. Unless I typed the email and stuck my neck out, demanding what I was worth.

The experience taught me an important lesson:

Retention measures (like pay raises) are reactive, not proactive. If your company feels that you're happy there, they won’t pay you more.

In this post, I’m going to tell you that the data backs this up, why this is the case, and what you can do about it.

Salary compression

Salary compression is what happens when companies don’t raise employees' salaries, but pay higher wages to attract new talent.

This imbalance between spending on new hires and existing workers has resulted in historic pay compression, with the gap between the wages of 20- to 24-year-olds (a reliable proxy for new hires) and 25- to 34-year-olds having shrunk to its smallest size in 36 years.

And this actually tends to impact the tech industry more so than others:

Salary Compression by Job Family

TLDR: employers are giving way more money to new hires compared to their existing employees.

This is pretty surprising considering the cost of replacing someone is high, companies have to:

  • Absorb hiring costs
  • Search in a competitive market for talent
  • Distract team members for another round of interviews
  • Deal with onboarding costs and lack of productivity for the first three months of new hire
  • Why does this happen?

Here are two possible reasons

Retention efforts take time

Solid retention efforts and policies are hard to measure initiatives and work over a long period of time, like 5 to 10 years.

And those are often things that can’t be prioritised because of the hyper-growth nature of the tech industry. Investors want to see results now.

Companies spend time and effort to pay the least amount of money they can on employee wages. They take pride in that. It’s much easier to bring new people in.

It’s not the right way to think about the world if you aim to be a great company.

Undeveloped career ladder strategy

One of the most common things that happens, especially at high growth start-ups, is that your workload increases beyond the tasks of your original role, but your salary doesn’t change.

Defining these internal career growth ladders is time-consuming. And so if it’s not been well-defined, then there’s no real precedent for you to get a raise.

In these cases, it’s not even the case that the company doesn’t want to give you a raise, it’s that they haven’t done the work to establish what the next step looks like.

What this means for you

There are factors you can negotiate with that are outside your base compensation, such as:

  • Remote work
  • Number of holidays
  • Professional development opportunities
  • Health and wellness benefits
  • Bonuses
  • Stock options or other long-term incentives
  • Your hours
  • Projects you get to work on

Money isn’t everything, It’s pretty cliché, but if you’re learning a ton, I don’t think you need to keep money at the forefront of your mind.

For example, at my last company, the first 12 months were great. I was learning something new every day and my salary didn’t matter too much to me because I was in “learning” mode.

The 6 months after that, though, were rough. When I stopped enjoying my work, all the focus became about my salary. And when I got the raise that I wanted, I realised that I was staying for the wrong reasons.

If you think the raise is going to solve your job satisfaction problems, keep in mind that it probably won’t.

But you deserve to get paid what you’re worth. And if you’re not, it’s time to change that.

Here are three principles you should keep in mind when negotiating a raise

It's all about the evidence

Identify your top two accomplishments over the last 6–8 months. Pick ones that have a quantifiable impact. This is your ammunition.

Present this info how you want, but make it as easy as possible for your boss to vouch for you. Don’t make him do any unnecessary work - ideally, it should be them forwarding the evidence you’ve presented (via a deck or a document) to his higher ups, and then they discuss it.

Have a clear salary number in mind. Do research on sites like Levels FYI, Glassdoor, H1BData, or even reach out to others in the industry.

Once you have a clear number, bump it up by 15-20%.

Keep your emotions out of it

“Anger is our friend. Not a nice friend. Not a gentle friend. But a loyal friend… It will always tell us when we have betrayed ourselves.” - Julia Cameron, The Artist’s Way

Anger can be good. But it’s not in your best interests to be angry when negotiating.

Instead, you want to be firm and solution-oriented. That means that you’re not fighting against your boss or the company - you’re on the same team figuring out how you can do your best work.

For example, if you give a number, and they come back with one that you’re unhappy with, instead of getting angry you can respond: “That doesn’t work for me. I’m curious how you arrived at that number. Can we walk through it?”

When you keep your emotions out of it, you’ll focus on how the promotion benefits them first and not you. And that’s what they want to hear.

Timing matters

If you have a performance review coming up in 3 months, don’t wait for 2.5 months to bring up your desire for a raise. Start now. Your boss will need time.

Two other tips:

  1. Try mentioning this after you’ve completed a great project. Recency bias is real.
  2. If you’re purely trying to maximise your money, the way to do it's to get a competing offer and ask your current company to match it or go above. But you’ve got to be ready to leave. High risk, high reward.

No one is waking up every day thinking, “Are my employees happy in with their job? Are they appreciated? Are they getting fair compensation?”

I owe it to myself to advocate to get fair pay for my work. As do you, go make it happen.