Reductive Internal Equity
In just a very short 4 years, the US has seen a compound annual growth rate of nearly 15% for the S&P 500 (1/1/2013 to 1/1/2017), this is a rate of growth that has brought significant wealth to many of the fortunate people with investments in the stock market. But this type of growth has also spawned millions of new jobs and a concomitant drop in the availability of talent for further expansion. While the markets have been racing forward, the rate of salary and wages growth has largely been tied to the post-recessionary period of minimal growth. Most of the talent we’ve spoken to for the past 2 years have been receiving annual ‘merit raises’ around 2.5%. That’s about equal to inflation, or slightly ahead. In short, wage growth is lagging the fervor of the economic expansion. Annual merit raises are deemed internal equity; i.e. every major company budgets for their annual payroll expenses and part of the responsibilities of the HR executive is to moderate the growth of wages; within budget. Most VP’s of HR are bonused on meeting wage budgets.
But the search for talent presents a stark contrast to the logic of 2.5% merit raises. The electrical industry is facing a renaissance in technological growth; unseen in its history. The growth of ‘smart’ in power distribution equipment, power transmission, lighting and sophisticated control systems has outpaced the ‘smart’ of the talent pool; in most cases. While training budgets have barely budged over the past 5 years, the need for innovation talent is paramount. In just 5 years or less, we’ve seen the introduction of: EV charges, drones, artificial intelligence, virtual reality, cyber security, smart cities, smart buildings, smart homes, solar shingles, distributed power generation, DC power distribution strategies, wireless controls, autonomous cars, IoT and more. And they will all impact, now or in the future, the electrical industry. But as smart as your employees are, they’re not as smart as the people who are actually working to create those technologies. So how does a manufacturer or distributor of electrical stuff keep abreast of technologies that are experiencing explosive growth?
The national numbers for wage growth are modest, but many economic pundits have predicted that wage growth is about to pick up very soon. In many industries, technology hasn’t uprooted the core processes or practices… but in our industry, we’re at the forefront of many of these technologies. Whether that means we’re directly developing them, or merely incorporating the technology into our business… we’re at the forefront of the applied effects of tech.
We’re asked regularly to identify and qualify ‘new’ talent; innovation geeks, engineers, marketing, technicians and salespeople who are already connected with customers to promote new technologies. Finding and recruiting technology people into legacy companies in the electrical industry is a pure art. Think of the GE commercials that are pointedly trying to accentuate that GE is in ‘tech’; and that talented engineers with state of the art technology skills can actually help design aircraft turbines, wind turbines, locomotives, medical diagnostic equipment and more.
And then there’s the wage and salary issue. We see wages rising rapidly; but we also see the significant pain and concern of our clients. Understandably, they are linked to the internal equity of their current employee base. Reaching outside of the legacy pay bands is a threat to the company’s annual profit goals, because eventually the wage structure will have to increase significantly to attract talent that has skills that aren’t well represented internally. And you can’t simply create a second class of employees of ‘legacy people’ and ‘new tech’ people.
The additional stressor on wages is the expectation of talent to command much higher increases in their compensation to make a move. Relocation is a much more difficult barrier to overcome than even 3 years ago. The expected ‘cost’ to move a family is embedded in the salary demands to make that move. Years ago we often advised our clients that it took a 15% raise over existing compensation to move an experienced employee to a new company. Those days are over.
We are universally seeing a transition of the largest sector of employment moving into retirement with a much smaller generation trying to fill those shoes. At the same time, we see a change in business practices: communication skills are eroding, social media presence is a distraction throughout the business day, spelling, sentence construction and even basic writing skills have been subsumed by acronyms and emoji’s. Social skills of personal interaction have eroded as well; with the strong preference to text somebody, than actually talk to them. Imagine a product innovation project being relegated to 144 characters of twitter-speak. The essence of communication is slipping away.
So, how do we attract the talent of today, under the rules of tomorrow? I have a four step approach:
1. Define talent acquisition as a ROI project. If your new techie delivers the ROI in under three years… you’ve made a solid hire. Rinse and repeat.
2. Revise your internal equity pay grades to reflect an internal rate of return and adjust accordingly. That will increase payroll for your higher-performing legacy employees (and reduce their flight), and diminish or flat line the investment for the non-producers.
3. Raise your wage/comp budgets. It’s coming, whether you see it or not… it’s already here and talent is VERY scarce. Your next hire will be more than you wanted to pay.
4. Breathe. The market is growing, the changes are endemic across the industry, so it’s not just you… it’s the new normal for the next several years (even throughout the inevitable, looming recession).