The Myth of Compensation & The Law of Supply and Demand

Do you think supply and demand govern employee compensation? Have you ever wondered why one would end up offering a higher salary to a new entry-level hire than what was already offered to an entry level employee last year or years before? (The scenario assumes that employment type, educational level, work location, etc are controlled factors).

Let me take you back to the financial crisis of 2007 – 2008 although it could be painful. In 2009, hiring was dreadfully slow and we were courting jobless rates of double digits. Hiring freeze, dwindling profit margins, tumbling stock prices and “Barista” grads were common. What salary would have been offered to a new graduate, say with a M.S. or M.B.A. at that time? How much were the tech titans and investment bankers paying these brilliant minds then? I am pretty sure they got a low pay!

Fast forward to 2012 – 2013 when markets were moving higher (after the small correction in 2011) and hiring was steady, we were courting 7% unemployment. What would have been the salary offered to a fresh grad then?

Today, markets are even higher, companies are reporting record profits and huge cash reserves, and the Federal Reserve is getting ready to raise rates for the first time in a long time. What’s the offer to a fresh grad now? Definitely so much higher than before I presume.

This makes me wonder about the macroeconomics, the microeconomics and “The Law of Supply and Demand”.

If supply and demand principles govern pay practices, what happens to the employee who was hired at a lower salary when supply (fresh grads) was high and demand (jobs) was low? Currently demand is higher and the employers are hiring at a higher starting pay. On the other hand, the employee hired 5 years ago has worked his way up but may receive less pay than the new hires. Shouldn’t the employer increase the salary of the existing employee along with the shift in supply and demand? Again, this makes me question if supply and demand are the contributing factors for employee compensation.

If the employers are able to make employees accept reduced compensation or forgo a raise during market downturns, then shouldn’t they also increase compensation when market is better? Is there a way for existing employees’ salary to grow along with market demands, and economic factors?

Looks like the only way to increase employee compensation is for employees to find a better offer from another employer and become their new hires with a fatter paycheck. Unfortunately, the employers are losing talent due to incompetent pay practices.

Should annual compensation be revised considering cost of living and other economic factors?

How does your employer maintain compensation? Has your compensation increased with positive changes in market conditions with your existing employer?

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