Why You Are Overpaid
I wrote Why You Make Less Money in early 2013, which attempted to account for the many reasons some technology professionals make less than others with similar qualifications. Underpaying employees (defined as below market rate, which can admittedly be difficult to truly know) will cause problems for both the employee and his/her employer, but overpaying also creates some challenges on both sides that are often overlooked.
Rarely do I encounter someone in this industry who openly acknowledges being overpaid, but when it happens the conversation is not what you might expect. The realization of being overpaid is typically not met with a sense of pride or accomplishment, but rather a sense of fear. One explanation for the negative reaction is that the discovery is usually made during a job search (active or passive), where someone finds several employers are unwilling to approach their current compensation.
I am not suggesting that you should turn down job offers that are significantly above what you know is market rate, and taking advantage of market fluctuations is expected to some degree. However, there are three main dangers when it comes to being overpaid.
1. You’re locked in to your job unless you take a pay cut. Acknowledging that you are overpaid may not help.
2. You based your lifestyle on an unrealistic earning expectation.
3. You are likely first to go when rates normalize or the employer has financial difficulty.
If you are overpaid, it is vital that you recognize the anomaly and you should not base important financial or career decisions on current income.
It is useful to look at some possible explanations as to why one may be considered overpaid. (and how common it is)
Consulting or contracting dollars – In the technology world, these complicate market rate. Consulting companies and body shops charge big bucks, and they are able to hire salaried or hourly employees at levels well above what are typically paid to the client’s own staff. These premium rates and salaries are routinely explained by several contributing factors, such as the instability of contracting, the advantages of hiring temporary employees, or benefits plans. The compensation is also fairly easy to justify, as a company can easily afford to pay you 100K salary if it is known you’ll bill 2000 hours at $125 (250K).
The disparity between contractor/consultant pay and traditional employee pay primarily becomes an issue when someone makes the move from one world to the other. Most would expect to increase or maintain their compensation when changing employers, but that is usually not the case for contractors or consultants switching over. This is also why you may witness contract-to-hire employees trying to extend their contract period before conversion, as they are likely about to take a pay cut with little difference in any other aspect of the job. Very common
Unique combination of skills with unusual value to a specific company – An experience profile that is highly valued by one firm is much less valuable across the general market. An applicant with significant experience using every component of a company’s stack that also possesses highly-specific domain expertise may receive an inflated offer that won’t be matched by other employers. This situation is compounded when there are known competitors that value an identical skill set, and the cost of losing the employee will negatively impact the business. Rare
An employer early adopts and banks on a new technology – This is not dissimilar to the explanation above, with the exception that it is one particular skill that creates the variation. New hyped languages and platforms tend to cause spikes in demand that are impossible to fill with experienced workers, which temporarily raises wages above what they were and what they will likely be in the future. This creates a short-term seller’s market. Very common at any given time for certain skills
Unattractive employer – Companies that develop a poor industry reputation may resort to paying (and advertising) compensation above market in order to attract candidates. Other than promises of a brighter tomorrow, the easiest element to quickly alter is usually pay. A firm’s infamy may be the result of overworked staff, bad press, or even accumulating technical debt, and public opinion often remains negative long after the ills are repaired. Common
Poor benefits, limited perks – Job seekers tend to focus on salary and not overall value when comparing job offers. Part of this is ego-driven, as you are unlikely to brag about your firm’s high 401(k) match or insurance premium contribution at a cocktail party. Some companies recognize this and will scale back benefit offerings in order to maximize cash compensation and promote the perception that they are paying above market rate. This is not exactly overpaying when we consider the total package, but the statistics and surveys that provide market data primarily depend on cash compensation. Rare
Long employment tenure – Large organizations that schedule regular cost-of-living and salary increases into employment contracts often find themselves paying above market rate. Somewhat common for large firms
Compensated to take a chance on something risky – Startups that do not offer any form of equity or options to new hires may find themselves overpaying for talent. Employees that remain during or immediately after an acquisition will often be offered retention bonuses, which may indicate the company’s acknowledgment of uncertainty for future employment. Common
Counteroffer (upon resignation) or pre-emptive counteroffer (they knew you were looking) – Counteroffers may just be a corrective measure for long-term retention that bring an employee up to market rate, but in some instances a counteroffer is a method for only the short-term retention of an employee due to the inopportune timing of their resignation. In the latter case, compensation is often forced above market rate to ensure retention and project stability. The employee’s value temporarily spikes during key moments in a project, and a resignation with counteroffer at any key moment can result in overpayment. Once the project/goal is attained, the employee’s value returns to market rate but salary does not. Rare
Being overpaid is only a problem when you aren’t aware of it or sometimes when seeking new work. Research market rates for your skills and keep tabs on compensation trends in the industry. If you receive multiple offers below what you perceive as your market value, get some professional opinions from recruiters or colleagues.
Overpaid or not, I have often seen orgs go through and trim staff based almost solely on relative compensation, generally because someone somewhere wanted to trim expenses without regards to the impact on projects, teams, or future plans.
The worst examples were when the org cut the higher paid staff and then almost immediately hired inexperienced staff with no business knowledge of the org, for much less. The result was a drop in expenses along with a serious setback in development deadlines and quality.
So it isn’t always about the market rate for someone with your experience/skills – sometimes it is relative to the rate they can get a warm body for.
I’ve seen this as well. This also is part of the problem with fixed raises that can lead to lots of disparity between wages strictly based on tenure and not based on ability.
We are overpaid, only if you believe there is a legitimate market rate. My belief, developed as a result of a consulting role for HR compensation, is that HR makes its salary decision on other’s salaries, and then holds the line. The reason tech salaries do not grow more, even when there is such demand, is that corporations fix the rate, and then refuse to move it. They also know that they do not want to create a rush to the top, by allowing salaries to increase much.
There is a legitimate market rate (defined as usual/normal/standard price), but it’s nearly impossible to know and takes quite a bit of knowledge to even try and measure the value of certain skills over others. HR or hiring managers usually use the salary of others as a gauge, with the expectation that the team may discuss comp and that act could cause issues down the line. I’m not sure if companies are fixing rate – there are of course some examples of that we can point to where it was exposed, but in most small or mid-sized markets I wouldn’t expect some kind of conspiracy to keep rates down. In the markets I’ve worked, salaries have been growing and eventually do peak/plateau around a certain mark. Thanks for reading.
There is both implicit and explicit price-fixing:
Class-action suit accuses major tech firms of pay collusion (http://www.itworld.com/legal/162261/class-action-suit-accuses-tech-firms-pay-collusion)
Your link was the very obvious example I was referring to where price-fixing was exposed, mainly because it is fresh in our minds. But do we have other examples of this? To think that this kind of collusion is widespread on a national basis is probably a bit overreaching.
No, but that was the implicit part. HR departments know what everyone else is paying, via purchasable data, and have enough market power to hold the line to what corporate peers are paying for various roles. This is not to say there is no market at all, but that it is not much of a market, and certainly not a ‘free’ one.
My point was not that there is explicit market fixing, but that technology people on average should be paid more, not less, considering the supposed lack of skilled technologists.
This is getting into the definition of value and we could go very deep with this. Big companies may be purchasing data, but small ones likely aren’t, and that in itself can create an interesting dynamic. Most of my customers are small, and they tend to ask me what rate is versus telling me what the stats are on compensation. It’s tough to measure.
I would never argue that technology people should be paid less. The lack of skilled technologists is also debated, but then again I think that has more to do with the definition of ‘skilled’ and how individual companies interpret who is and isn’t ’employable’ at any given time. I do appreciate your thoughts on this, and it’s a topic that will be debated for some time.
My original intent was to highlight where there are some ‘artificial’ (for lack of a better word) abnormalities that I’ve been able to attribute to several instances where a candidate was not able to maintain compensation levels. It’s impossible to pinpoint an exact reason when you have so many variables.