One Reason Pay Is NOT Skyrocketing
For several months many of us have wondered why base pay wasn’t spiking upward out of respect for the historical strong job market. The basics premise of our economy is the strong demand and short supply results in high prices. This is true for peaches, cars, and people. With unemployment at very low levels and a job market continuing to create jobs at a rate of 210,000 per month, we should have been seeing pay rise far faster than our now sad 3% annual increase. It turns out the trickster was simple math.
On August 21, 2019, it was announced that our jobs reports since April 2018 were inflated by about 40,000 jobs per month. A new adjustment reduced this number to 170,000 jobs. This is about 125% over-reporting of the facts! This is the kind of error that would get any executive or compensation professional fired. It’s a level of error that could result in a maximum, instead of a target, payout on a highly leveraged incentive plan. It’s like paying your new Level 4 Accountant as if she was at Level 6 or 7. I think you get the point. In the real world this probably wouldn’t be an acceptable error.
The error does help explain the ongoing stagnation in base pay. We have posited that the lull was caused by the use of additional short term incentives. This ignores the fact that the majority of jobs have little or no incentive opportunity, We have read that the stagnation was due to low inflation. This ignored the whole “supply and demand” argument in a fundamental way. The fact is, job growth is just normal and what we have seen for most of the past decade. We were duped, but there is a bright side.
Our industry pay data, often maligned by people named me, stood up to this test pretty well. Even as politicians and economists bragged about the historically strong job market, we applied our principles. We looked at the data and applied our compensation philosophies. We adjusted when specific markets or positions moved to be more competitive, but we did not react to the fantastical world of growth that we could not see with our own eyes.
In short, we did our jobs and did them fairly well. We maintained our course because our data and experience told us more than the reports and breathless articles. Short-term incentives have increased, but mainly as a way to control budgets and most specifically support specific motivations. Some industries have seen explosive growth, but most have grown, or shrunk, as expected.
We have work to do but this is a strong confirmation that we have level heads and can apply what we know consistently. I should note that none of this truly defends average annual increases of 3% in a world where the stock market, housing prices, and medical costs are booming and executive pay has grown at about double the rate of the average person. It’s a start, a very good start.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is a leading expert on incentive plan and equity compensation issues and has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compen Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.