The Insider Guide to Careers
Insider information, secrets and tips about getting hired and building careers. For employees and job candidates.
Every employee would love to get paid well above what we serve in the market. As much as 20-30% of employees could fall into this group. High compensation occurs for three reasons: Mistakes during the hiring process, employees being in a role for a long time, and the result of having extraordinary skills that demand above the median compensation.
High wages are not always a good thing. The chances of being fired also go up with compensation. Google recently fired high performers and those making more than 1 million dollars in compensation. We will examine the reasons why.
Mistakes during the hiring process
The reason why compensation mismatches happen is because of the imperfect nature of the interview process. A typical interview lasts 30-45 minutes. The short duration is not enough to judge the skills and caliber of the job candidate. Both interviews and selection committee meetings are full of biases, errors, and calibration problems. Everybody who has worked in recruiting knows the enormous challenges of selecting the right candidate.
Interestingly, nobody has any idea how to fix these problems. Even interviews have been found to have a validity of 51% when it comes to predicting on the job performance. That is how bad they are. You can replace the entire long-winded interview process with a coin toss and be in no way worse off.
Because of interviewing mistakes, it is common for people with mismatched skills to be hired and offered high compensation.
Being in a role for a long time
The standard rule for most employees is that they are paid at the market median when they join work. They get higher pay as they gain skills until no further compensation increase is possible. It is at that point that the employee gets promoted.
Unfortunately, many employees, especially in managerial positions, don’t have the skills to get promoted to the next level. They either have some niche skills unavailable in the market or perform above average in their current role. This ensures they will not be terminated or fired by the manager.
The crisis point happens when, over time, the employee keeps getting the cost of living salary increases that all employees are eligible for. The compensation numbers keep nudging up until, at a certain point, it is way above what everyone else in the team (or company) makes for a comparable role. The manager has a choice to make at that juncture. They can either lay off the employee and get someone from the market at a fraction of the current compensation or continue to raise wages every year and face the wrath of the compensation audit teams.
For example, if the Vice President comes to managers asking them to cut down operating expenses, the manager has two choices. They can either remove a couple of low-paid employees or cut down on one highly-paid employee. The obvious choice for minimum disruption is where one employee is fired compared to a bunch. This choice also minimizes heartburn among the employees who are not fired and stick around in the company.
Having extraordinary skills
Some employees bring excellent value to the company and demand a wage premium. These employees think their jobs will never be impacted during lay-offs as they add value and can always find employment elsewhere. The loophole with this strategy is that companies hate having positions where the skills required cannot find applicants in the market.
There is a well-defined process within the HR function of job leveling and skills mapping. This evaluation ensures that every job is reduced to the bare minimum – in line with how other companies have redefined positions. If one job is too hard to backfill (get qualified applicants), the role is broken down into two or three pieces, where getting replacements is easier.
Of course, the manager would face issues in backfilling great talent. The new person (or people) joining the team would have a steep hill to climb to learn and deliver on the job. A couple of strategies used by the manager to ameliorate the situation include:
Conclusion
Companies are becoming prudent in being lean and operationally efficient. Gone are the days of extraordinary compensation, which occurred during a unique time in history with zero interest rates and high economic growth. Considering where economies are right now, where borrowing costs for companies have dramatically increased, and economic growth is slowing down, the bargaining power is now firmly with employers. This change is reflected in the comments of one of the industrial tycoons, Tim Gurner, who noted recently that “Workers have become too arrogant, lazy and must be taught a painful lesson.”
This swing in the balance of power will last many years or not decades. It is a painful reminder to employees that they are lucky to have a job and that the more well-compensated they are, the greater the chance of losing that.
The best way to deal with such factors outside your control is to focus on skills. You always want to be in a job where either your skills and pay are an exact match (you are paid right at the middle of the market) or a position where your compensation is above your skills. Hopefully, when skills are above your pay, you also learn a lot to prepare for the next position. The right compensation (comp) will then be just a job hop away. The most dangerous spot to be is where your comp is ahead of your skills. At this point, you are at your most vulnerable, and it will definitely end faster than you think.
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