As America’s job market improves, the most highly skilled workers can afford to be choosier and ask for higher pay.
If you’re not paying them, someone else will.
That’s the realization many companies will likely face in 2015. Many businesses remain cautious when it comes to paying for talent, even as executives grow more confident in the economy as it enters a more prosperous time. The problem is these managers still have the mindset that their employees are just happy to have a job. Or perhaps they are lulled into a false hope that they can continue to keep wages where they dipped in 2008.
However, this just isn’t to going to work anymore, at least according to a new survey released by my company, PayScale. The report shows most managers are feeling optimistic about their company’s financial performance. In fact, more organizations grew in 2014 than in previous years and nearly three-quarters of the 5,500 business leaders and managers who responded said they expect to be in better financial shape in 2015.
While this is encouraging news, executives also need a strategy for retaining their most qualified people as the market for talent heats up. The report found that nearly 60% of respondents said employee retention was their top concern for 2015. In addition, industries with a large percentage of skilled professionals – such as the professional, scientific and technology services sector – were most concerned with retention.
Increasing pay for those that are under-compensated is the surest way to improve retention. While many economic indicators show we’ve rebounded from the recession, wage growth has been lagging far behind these other metrics. In fact real wages are down almost 8% since 2006 when factoring wage growth combined with inflation. In 2014, the annual wage growth rose a paltry 1.7%. Although that’s a slight increase from the flat or negative growth over the previous six years, it’s still far from making salaries competitive for certain industries, such as the IT, biotech and pharmaceutical sectors.
The reality is wage growth has been stagnant for more than a decade, yet corporate profits are at an all- time high. Until recently, employees – even those with highly coveted skills – didn’t have much negotiating power. It’s been a buyer’s market. However, that is changing as the unemployment rate continues to decline. Savvy companies with the financial means will address retention concerns for their top performers with bigger paychecks, putting upward pressure on salaries in the most competitive pockets of the talent economy.
The problem of stagnant wages is most apparent in markets that have highly skilled professionals with very specific qualifications (a ‘purple squirrel’ in HR circles). These include positions such as engineers, software developers, statisticians and senior managers. Companies might get away with offering low or no wage increases in the retail or hospitality industry which has many minimum wage employees. However, for highly skilled employees in the technology industry, for example, employers risk losing key talent if they don’t adjust wages to reflect the current market demand for unique combinations of skills.
Over the last decade, these skilled jobs have fared better than the national average with some jobs experiencing annual wage increases of 3 or 4%, but these modest pay increases do not address the actual flight risk of some highly trained professionals. Employers may be surprised to learn they need to offer 10% or even 20% more than they anticipated after they consider the market demand for these elusive employees. But, there’s value in paying up for purple squirrels. Their contribution can be immeasurable driving a significant impact on the bottom line of your business.
The good news is we can all begin to feel more optimistic about our rebounding economy. We should realize however that this means talent markets are heating up. It’s time to shake off the recession-era mind-set around compensation because many of your most valuable employees may also feel bullish enough to go looking for a better deal. In today’s knowledge-based economy, the cliché– people are our biggest asset – might just turn out to be true.
Tim Low is vice president of marketing at PayScale, an online salary, benefits and compensation software company.