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Compensation theories of convenience (first appeared in InfoWorld)

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There are times when all choices are of the Hobson’s variety. Take the upcoming election: We’ll all get to choose between Al (The Buddhist) Gore and George (The Real Reformer) Bush.

And if you think choosing between these two yutzes is Hobsonesque, IT salaries must be driving you nuts.

A recent Wall Street Journal article described the sad plight of managers who are forced to pay new hires far more than loyal, longstanding employees, thereby running the risk of ticking off said long-standers. The Journal presents this dilemma as a thorny corporate issue. Probably because it interviewed only managers, it did not report the dilemma for what it is: Poetic justice rather than Hobson’s choice. The problem arises because employees believed what they were told.

In the early 1980s, corporate America adopted the market theory of compensation. According to this theory, companies should pay employees what the labor market will bear. Neither seniority nor value is relevant. The price of labor is a commodity, subject to the same laws of supply and demand as cinder blocks and lentils.

At the time, with inflation high, jobs scarce and job hunters abundant, this theory was convenient – it justified salary increases below the rate of inflation. Not only that, but administered fairly it did and does makes sense, since it sets compensation at the balance point where companies have no incentive to replace employees with applicants willing to work for less and employees aren’t tempted to look elsewhere in order to obtain large salary increases.

Alas, with the current labor shortage driving labor rates higher, the market theory has become inconvenient for corporate America.

Corporate leaders gripe that they can’t keep salaries competitive, so they lose valuable talent, pay premium prices to replace it, then experience morale problems and more attrition when formerly loyal employees find out they’re paid a lot less than newcomers. But it isn’t that they can’t keep salaries competitive … they simply won’t. Proof? Fuel costs are also skyrocketing right now, also because demand exceeds supply. Executives aren’t refusing to pay the higher fuel prices because if they did they’d run out of gas.

Want some advice? Schedule a meeting with your CEO and HR director as soon as you can. Explain that within IT at least, the company has three options, and that while you’re willing to accept any one of them, you want to make sure the company has made the optimal choice.

The options: (1) Keep employee salaries competitive with the marketplace to minimize unwanted attrition and maximize morale; (2) keep employee salaries where they are and watch them drift up anyway as employees paid less than market rates leave and are replaced by new ones who are paid at market rates while they spend months becoming effective; (3) keep employee salaries where they are, refuse to pay market rates for new hires in the twin interests of frugality and fairness, and instead pay premium prices for contractors to fill the empty positions for which you can’t attract applicants.

The market does set the price. Your choice is in how you choose to pay it.