Why is salary a problematic subject for many companies?

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“Why are rookies earning more than us?” This question is present in the minds of many professionals, even those not so experienced. Salary is a complex issue for companies to manage, as it can be both a source of frustration and fulfillment. Although not the only important point in his career, he greatly matters.

Most companies still see salary as a cost – representing up to 70% of expenses – and an obstacle in the search for profitability. Although companies’ average profit has grown in some sectors, its general rate is 11%. After all, many of these organizations seek to reward employees for their skills and performance.

Employee compensation is usually driven by demand and supply in the local market, following the traditional law of supply and demand. The more in need skill is in the market, the better it will be paid. However, regulations such as setting a minimum wage and variable taxes can influence this context.

Because when there are many highly qualified professionals and not enough jobs, the salary will be low. In this scenario, a waiter may earn more than an accountant, and managers earn less than their direct reports, oddly enough. That’s because the direct report has a harder-to-find skill set, such as software development.

Skills only matter if the job demands them. Therefore, salary should not reflect the professional’s skill set but the intersection between what the job needs and what the employee has to offer. Therefore, if the job does not require software development, the compensation will not involve the value of this skill.

Companies often check what others are paying and try to do the same (by doing salary surveys). But these salary surveys can be misinterpreted, and not every company does an excellent job of reading the results, generating gaps and questions.

The cost of living does not always correlate with compensation. For example, moving to London for a higher salary will also result in a high cost of living, reducing the benefit of the higher wage (as education/transport/housing can be much more expensive than your salary increase).

Certifications don’t make money anymore – the skill set does

Getting a degree isn’t everything – especially if the employee doesn’t know how to do the job. Certifications (including MBA or other degrees) are nothing more than proof that a professional has attended some training courses to build a skill set.

Whether or not the employee can implement his learnings is another matter entirely. There are other ways to acquire the same important skill set through active learning with the proper support.

There are common concerns for companies:

  • Time is an essential factor. A professional may have a skill set in high demand at any given time (and therefore get 30-40% extra in terms of pay), for example, when getting a job at a company that is opening a new branch or when an organization is in urgent need of a specific skill set.
  • The same work in a company will rarely be paid the same way. Typically, companies aim for a +/-20% variance from the market salary. There are always exceptions to the rules, but employees cannot control them.
  • Freezing promotions and salary increases are normal practices in organizations. It usually happens when the company believes it may not meet its financial goals or foresees a crisis (2008, COVID, etc.). After all, salary is the most significant expense.
  • Even well-paid executives complain about their pay and quit for better pay. It’s human nature to want more. But below a certain amount, there is tremendous pressure on compensation (since people can barely pay the minimum).
  • Performance is essential and must be correlated with salary. The best performing employees will always receive better raises or bonuses but may not receive the best overall pay – as some may have been “luckier” upon joining.
  • Companies aim to correct this “luck” factor and do so over a long period. Overpaid employees tend to get smaller raises, a lower percentage of salary increase in promotion, etc.
  • Companies will try to adjust salary discrepancies longer. If the market is hot and salaries increase for a skill set – it will take a company 2, 3, or even four years to adjust everyone to the new level. This is to avoid harming finances.

Sometimes a higher salary can be an early warning sign

The salary policy is a strategy, and there are examples of companies overpaying not to have as much of a need to worry about providing training and development opportunities – or worse yet, to cover up more significant problems within the organization.

Therefore, the best way to increase wages is to improve the skill set and look for growth opportunities within the company (and beyond).

The employee must expand their skill set to take on more complex roles and move up the hierarchy. It will always pay off in the long run, but rarely in the short run. So, for example, a professional might end up quitting and finding an organization that pays 20% more elsewhere, thanks to their new skill set.

Instead, the professional can focus on increasing their market value. He cannot control how companies act but can hold his salary by concentrating on growth.

Being overpaid is good for the short term, but not the long term – an above-market salary does more harm than good. There are people stuck in jobs they hate just because they are paid too high and are not willing to accept less for a better position.

Trading is a double-edged sword. It can work, but it can also harm. It is up to the professional to press for this while being aware of the risks: the employee can put himself and his manager in a bad spotlight.

A good company usually offers a good salary. However, if employee asks for too little, company should offer what was approved, and if candidate asks for too much, company should reject the candidate to be fair to others and their cost base.

Salary should result from our long-term efforts to learn and grow, not something we should pursue in the short term. Therefore, professionals should look for companies and roles in which they can learn and grow and do their best to do so!