Normalizing pay to years experience is a bad move in general, IMO.
You are going to have a distribution of high and low performers at all levels of experience. If you pay all the senior people the same, you have less money to pay your high performers. And maybe they go get that pay from elsewhere.
There's a difference between having 20 years of experience and one year of experience 20 times.
If the job is something with such a steep learning curve and plateau (maybe due to periodic technical revolutions?) that someone with 20 years experience is only insignificantly better than someone with 5 years experience, economics would support paying them the same. If we want to artificially subsidize some more expensive older workers, they should be subsidized directly by society, not by forcing employers to do so.
(There are a lot of jobs where 20 years gives better performance, or where being 51% good va 50% good would be worth a huge premium, but not all.)
Where this really gets complex is startups which are growing in headcount and shrinking in equity offer size. An early hire there might be objectively worse than a new marginal hire but has an equity vesting package which makes him vastly better paid for each month today. IIRC it was Zynga which tried to forcibly renegotiate this (instead of just firing people who were presently underperforming, the usual route).
This is pretty standard because it is a quick and dirty proxy to those who have most the internal experience. Sometimes companies will layoff people who are more senior because of cost, but the reality is most senior people are not making double of those who just joined. A 20% difference in pay simply is not enough to take on the risk accidentally getting rid of people who have key knowledge.
I disagree here. I've seen many cases in FAANG of someone being hired at a lower level than they should, just because the company gets away with it, and the hired person still gets better compensation than they were getting before.
So you can certainly have both newgrads and people with years of experience being paid the same. Although not for the reasons that you initially mentioned.
OK, but then what is the long-term business justification for paying more-experienced staff less than less-experienced staff?
I get that the short-term justification is "we can get away with paying the former less because enough of them will be afraid to leave."
But is there another justification?
In my experience, at large companies "cash flow" would not even vaguely register the difference of increasing salaries for experienced people you want to keep, and it would be a marvelous signal to the rest.
Yeah I am convinced seniority is a kind of a scheme too. Sure, people get better, but there is also cost to switching jobs and that is probably even more pronounced and not priced in.
I think it is in large part way to underpay people earlier in life and overpay them later in order to incentive them differently. It also is a rough cudgel to match family vs single difference in needs.
You want to keep the higher paid staff more than the lower paid staff. That’s why you pay them more.
Which staff you want to retain depends on a lot of things other than seniority and pay, but that's not the point. More senior staff are already being paid more.
Let's reframe this problem slightly. Imagine you have two people, one on 100k and the other on 500k. The difference in 'value' is measured as 400k. If you give both of them 5% raises, so one is 105k and the other is on 525k, the difference in value is now 420k. Why has the pay differential between junior and senior staff increased by 20k now? If you don't fix it, over a couple of decades you're going to be paying your junior staff an order of magnitude less than the seniors. How do you justify that?
Here's another example. Imagine there's a company where seniors are paid slightly different amounts despite doing the same work. One is on 200k and another is on 180k. If you give both of them 5% that's really giving the higher paid one 1k more (10k vs 9k). You can't claim that it's fair to give someone a bigger pay rise on the basis that they already earn more. That makes no sense.
Blanket percentage-based pay rises don't work. Companies should be more intelligent and work out more nuanced solutions.
I mean that's not so weird, for some roles pay is standardized, but for other roles like a software engineer, or an AE it can vary widely based on experience. And nobody wants to post 7 job postings with level 1, level 2, level 3 etc.
It's downright silly to pay new employees more than experienced employees for similar jobs. If you can't afford to raise wages for the experienced staff you'll soon have a bunch of inexperienced staff that costs you more.
The formula is to lay off senior people who are at the higher end of the paygrade salary range and hire similarly experienced people at the lower end of the salary range. They can shave off ~50k for every such position. It sucks and it happens a lot when you are older.
This exception wise might be the case but, the cost to performance is probably just less for some senior folks compared to up and coming new people. For instance if i have 10+ year employee who has received 3% cost of living raises + additional performance raises they likely have a cost/performance ratio worse than the A player with 5 years experience who wants to move up. I can promote them for a bump in salary and have someone who hasn't accumulated as much cost overtime with a similar performance. I reduced capacity, improved moral for an A player and cut cost in one decision. There would also be minimal impact moral wise to the remaining organization by hiring within. That's just my take though and I am no authority in the topic.
We've discussed the long term, and we all agree: it's not something that will stay like this forever. In the long term I don't think it would be fair to maintain a perfectly flat pay structure; we won't always hire people with the same set of skills or experience or responsibilities.
I don't expect to keep this system forever, but it's a good fit for us at this particular moment in time. I expect it will change as we change.
Experience isn’t the only variable in determining compensation.
Some companies will simply pay people whatever it takes to convince them to join the company, which results in compensation that’s all over the place.
Some companies have surprisingly uniform compensation, some to the extreme that all developers are paid the same compensation in lock-step. This is usually an attempt to make things fair, but it creates a lot of animosity when people feel they deserve more than their coworkers.
And some times, it really does make sense to hire less experienced people into high-paying roles of their career trajectory looks promising. Hiring isn’t just about selecting for the height of experience on a bar chart. It’s also about looking at the slope. Less experienced employees who are growing very fast are best hired at high salaries, otherwise they’re just going to leave in a year when they grow even more. Conversely, if they fail to grow into the role they might need to be let go to make room for someone more appropriate for the position.
One of the tricky things about teams sharing compensation is that there is almost never a specific ordering of salaries that everyone on the team would agree is appropriate. It’s one of those situations where 80% of people on a team might see themselves as being in the top 20%.
As always, it helps to collect competing offers elsewhere. It helps even more to be prepared to take those offers if they pay more and higher salary is your highest priority.
It sounds like just a bad deal. You don't have to do it based on credentials. They could have grandfathered in everyone, a subset of top performers, or made it based on role; the role USUALLY hires grads, but not always. You see this in manufacturing where machine operators occasionally work as engineers. The flip side is maybe you WERE being overpaid, able to trick your way to some kind of advantage, and got caught.
It does make it more challenging to reward top performers, who might be better off just sitting back and taking it easy, since number of years dictate pay... this is a problem anyway in my industry. People do notice if you're especially lazy or ambitious, but it often all looks the same, and doesn't matter unless you have eyes on management. You wind up being a necessary evil almost no matter what.
I do agree about being too focused on credentials. I could see how this system could do this, but it doesn't have to be that way.
Interesting read but they hand waved the scaling problems this can create. What do you do when you have to change the compensation system?
Do you lower people’s salaries or pay them less than new hires? They’re not going to like that.
Do you leave early employees in a legacy system forever? That can reinforce an in crowd/out crowd dynamic among employees which can damage team cohesion.
That also has some flaws if not combined with gender/race ratio in those levels. Underpaying for the same level isn't the only potential issue, but bias in hiring and promotions for more senior roles could be too.
I agree. I work one of germanys biggest engineering companies (automotive sector), where pay is pretty much equal. There are certain job levels (secretary, technician, engineer, manager, etc.), but inside of these levels the salary is only determined by "years of experience" (which is mostly how long you have been in the company). I found it totally frustrating, because independent on how much effort you put in your work and how much benefit you bring to the company you won't get any monetary benefit or promotion. On the other side you see some older guys which are leaning back and waiting for retirement which get higher salaries. This really lowers the motivation to achieve something good amongst all employees after a while.
It was one of the reasons I resigned and will start at a smaller company next month.
I agree that older candidates typically have expectations of higher total compensation.
My point is that, either:
1. That expectation is unfounded -- they are looking to be paid out of proportion to the value they would provide back to the company, or
2. That expectation is justified, in which case the cash-poor company should find some way of striking a deal, so that they can bring on an employee of high value.
This is often the natural result of older workers just being at the same company for a long time. If you assume a 5% raise annually even if you're not that great of an employee, over 20 years you'll be making 50% more after inflation than a new employee would. Then if you factor in pensions, 401k matches, etc. which tend to ramp up over vesting periods you end up with long-term employees being really expensive relative to a new/younger employee.
It would be nice if total compensation was always tied strictly to merit, but that's not the real world for large companies.
You are going to have a distribution of high and low performers at all levels of experience. If you pay all the senior people the same, you have less money to pay your high performers. And maybe they go get that pay from elsewhere.
There's a difference between having 20 years of experience and one year of experience 20 times.
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