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I don’t pay good wages because I have a lot of money; I have a lot of money because I pay good wages. – Robert Bosch (1861-1942)
The New Reality
The tension between employers and employees is constantly shifting based on supply and demand, government regulation, demographic changes and geopolitical considerations. Since early 2020, another factor affecting supply and demand has become relevant. With the onset of the COVID-19 pandemic, most businesses saw some demand reduction, and many saw a drastic reduction in activity. Many employees of these businesses saw reduced incomes, and some saw their positions eliminated, at least temporarily.
Now, in early 2022, even though the number of COVID-19 infections continues to rise dramatically, most businesses in North America are benefitting from several factors that are allowing them to cope better than a year earlier. A large percentage of the population has some level of vaccination protection and as a society, we have adopted some basic procedures and norms that are reducing the risk of infection. The medical community has greatly increased its ability to deal with infected patients and prevent serious illness and death.
Businesses are also learning to cope, and life has returned to some level of normality despite a background of the ongoing pandemic. As businesses open up again, the call is going out to refill positions that were vacated earlier in the pandemic and to some extent, that call is being met with a muted response from potential candidates. The reason for that reluctancy has several root causes:
Candidates are well aware of the current inflationary pressures in the marketplace (especially housing costs) and are going to be very careful that the new position that they accept will meet the needs of their household budget.
2. Lower Tolerance for Risk
Any change from the status quo involves some sort of risk. In the case of a change in employers, everyone knows of cases where the new situation was not as advertised (or assumed). The new employer is in worse financial condition than it appeared. The new boss is not as personable as they were during the interview. The working conditions are not as expected. The bonus formula is not what was promised, etc., etc.
Under normal conditions, candidates are often willing to assume this risk in exchange for improved compensation and perhaps other benefits that are both financial and non-financial. Under current conditions, some candidates will still assume the risk of change, however, they are demanding considerably more compensation to assume this risk. Perhaps this is because of general uncertainty in the economic background (inflation, technological change, commercial instability).
Whatever the cause, it is reducing the number of candidates who are readily available to assume a new position with a different employer. This reduction is having the expected effect on the compensation required to fill open positions, where it is now not uncommon to find a 15-20% gap between what employers believe to be the “market” rate for a given position and what candidates who are qualified to fill that position are willing to accept.
3. Working Conditions
Many employees have come to expect that “working from home” will be a normal feature of working life, at least part of the time. A related expectation is that their performance will be assessed based on what they accomplish and not on simply “being present”. They expect to not be micromanaged but assigned broad goals and be left to attain their goals independently in the best way that they see fit. If a new position doesn’t clearly offer this new reality, candidates are less interested in applying for it.
This kind of pandemic-related effect has occurred before.
The Black Death encouraged the innovation of labour-saving technologies, leading to higher productivity. There was a shift from grain farming to animal husbandry. Grain farming was very labour-intensive, but animal husbandry needed only a shepherd and a few dogs and pastureland.
The plague brought an eventual end to serfdom in Western Europe. The manorial system was already in trouble, but the Black Death assured its demise throughout much of western and central Europe by 1500. Severe depopulation and migration of the village to cities caused an acute shortage of agricultural labourers. Many villages were abandoned. In England, more than 1,300 villages were deserted between 1350 and 1500. Wages of labourers were high, but the rise in nominal wages following the Black Death was swamped by post-Plague inflation so that real wages fell.
Labour was in such a short supply that lords were forced to give better terms of tenure. This resulted in much lower rents in Western Europe. By 1500, a new form of tenure called copyhold became prevalent in Europe. In copyhold, both a lord and peasant made their best business deal, whereby the peasant got use of the land and the lord got a fixed annual payment, and both possessed a copy of the tenure agreement. Serfdom did not end everywhere: it lingered in parts of Western Europe and was only introduced to Eastern Europe after the Black Death.
There was also a change in the inheritance law. Before the plague, only sons, and especially the elder son, inherited the ancestral property. Post-plague, all sons as well as daughters started inheriting property.
Facing the Situation
As much as the increased cost of hiring is upsetting to employers, the realization that their entire workforce may be underpaid is much more upsetting. Left unaddressed, it is only a matter of time before existing employees become aware that their compensation has fallen below current market rates and begin to address the problem. This may, initially, take the form of comments and complaints and then, finally, resignations. First to leave will be the best and the brightest, who have the greatest market appeal. Next will be the average performers who are now in greater demand than ever before due to the tight market conditions. Left to the intransigent employer are a cadre of poor performers who are, even in the environment of higher expectations, still probably overpaid for the mediocre work that they do.
In terms of employee groups, the first to go will be people in sales. They are always the ones who are most mobile, most aware of market demand for their services and most driven by economics. Next to go will be those in the administration/finance ranks and then, finally, the technical people. Techies hate change and, while this is an oversimplification, they really do love their jobs and are generally committed to doing what they do, apart from what they are being paid. When the technical people start leaving in droves, an employer will know that they are at the end of the process.
How to Stop It?
Address the situation through openly acknowledging the situation to employees, making salary range adjustments, a general base salary adjustment and perhaps some special performance-based adjustments to prevent top performers from jumping ship.
At some point, equilibrium will return. Until then, meet the demands by new hires for higher compensation as necessary and take a defensive posture with existing staff through both general and selective compensation adjustments.
Kathbern Management is an executive search firm based in Toronto, helping companies find the executives and senior managers who not only have the experience and credentials to fulfill their responsibilities, but also have the emotional and “fit” requirements that will enable them to be successful in a particular environment. We simplify the process and, through our deep research, are able to bring more and better candidates forward than would ever be possible through a do-it-yourself passive advertising campaign.
Contact us today for a free consultation about your key person search.