There are multiple factors that determine employee compensation such as employee and company performance, pay policy, inflation, market rates, industry employment costs, and the economic outlook. Some are controllable but others are largely beyond management control. Market value is one that is uncontrollable.
Contractors must consider the value of their employees on the open market. This market value changes as a result of wage and benefit adjustments as well as supply and demand. The current high demand for experienced construction professionals in most sectors is continuing to expose a high degree of “wage compression.” This occurs when new hires command higher wages than current employees. A slump in construction activity followed by high demand is usually the cause. When this happens the company must get past the “sticker shock” and match the market for both new and existing employees.
Current state of pay
Pay is cruising along in our industry. Actual 2015 annual pay increases averaged:
- 4.1% for construction executives
- 3.7% for construction middle management and professionals
- 3.6% for open shop craft workers.
At PAS, we expect contractors to experience similar increases in 2016. As reported by WorldatWork, AON Hewitt, Willis Towers Watson, and others, the average 2015 and 2016 increases for all industries nationwide was approximately 3.0%. What appears to be a minuscule difference between construction and other industries is actually a matter of perspective. Think of it this way: that 4.1% executive increase in 2015 is 33% higher than the national average in other industries. Indeed significant, but that isn’t the whole story.
What was reported as an “annual pay increase” for existing employees doesn’t account for the total change in pay from 2015 to 2016. Actual pay changed substantially for some positions that continue to be high in demand. For example, actual pay for construction managers changed by 11.5% from 2015 to 2016, well above the 3.7% reported as the annual increase for middle managers. Similarly, actual pay increased for chief field engineers by 8.6%, for electrical project superintendents by 7.4%, and so on. Much of this difference is likely driven by demand and the amount needed to recruit an experienced workforce. This results in new employees making higher pay than existing employees (wage compression), even though current employees may have more experience.
Inequality of pay
When wage compression occurs, you can count on two things happening—both causing a contractor pain. First, it only takes a few weeks before everyone knows the new employee’s base pay. Hopefully, market value was addressed internally and pay changes made to current employees before the new hire was made an offer. If not, expect employees to get a destructive vibe that leads to the second happening: now everyone is aware of the real market value for their position, potentially attracting them to a competitor for higher pay.
Employees get it. Base pay is the springboard to increased variable pay and deferred compensation. Because most incentive and bonus, and some benefit programs, are based on a percent of base salary, the higher the base pay the higher the bonus or incentive potential, 401(k) matches, pension, and profit sharing allocations.
To keep up with market rates takes effort and costs money. However, in the long run contractors really don’t have much choice except to match market values to remain competitive in their recruiting and retention efforts.