01/04/00
By: Sabrina Jones, InsideVC

Larry East was 23 in 1964, when he began earning $3,000 a year at IBM in Toronto. By the '80s - when salaries soared to beat inflation - he still made a good deal more than the company's new batch of workers.

But other employees lower on the pay ladder were less fortunate. Tensions simmered as many of them watched newcomers' salaries in similar jobs eclipse their own.

"During those inflation years, starting salaries were exceeding (those of) people who had been at the company two or three years," said East, who now lives in Carrboro, N.C.

He was earning $80,000 as a marketing manager when he left Big Blue in 1992. "Their take was: 'Either pay me more or I'll go elsewhere.' There were quite a few people who ended up leaving the company."

Inflation spurred salary growth in those years, but now it's the drought of available skilled workers that drives companies to take a no-holds-barred approach to hiring new employees. With the nation's unemployment rate at a 30-year low of 4.1 percent, business are rolling out the red carpet to attract bodies - offering higher salaries, signing bonuses and stock options.

Meanwhile, some seasoned staffers plod along financially with 4 percent annual raises and ponder send out resumes.

In this golden age of employment, some thing the payoff for their work is tarnished.

It's no illusion that the air-tight job market creates disparities in pay between new and old workers, said Paul Dorf managing director for Compensation Resources, a compensation consulting firm in Upper Saddle River, N.J. It's a process called wage or salary compression: hiring a new person who earns as much or more than current workers.

Companies are enticing some workers from current employers with pay increased of 15 percent to 20 percent, while more experienced employees might take home 3.5 percent annual pay raises, Dorf said.

"They're moving ahead at a much faster pace," Dorf said. "If you've got a 15 to 20 percent increase, an employee getting 3 percent increases would take five years to get to the same place. (New workers) are leapfrogging over the person who's been there."

That's particularly the case in burgeoning fields like technology and engineering.

East, the IBM retiree, said he's no longer surprised when he hears tales of kids straight out of college or even high school making $50,000 a year - a salary that took him 30 years to reach.

And beginning salaries in other industries aren't shabby, either. Chemical engineering graduates in the college class of '99 averaged $46,929 a year, according to a national survey by the National Association of Colleges and Employers. Consulting firms wooed management information systems grads with offers as high as $49,000.

Employers who don't try to balance the disparity risk losing workers who might choose to try their luck in the market's hiring frenzy, Wald said.

"There's no law that says you have to pay long-term employees more than new employees, but there's a disruption in the work force," Wald said. "If you have unhappy employees, you're going to have lost productivity. Employees my start looking for new jobs."

That's a sources of stress for companies, said Kabir Mahadeva, a Raleigh, N.C.- based recruiter of workers for high-tech companies. Well-run businesses must find new workers without losing older ones, and that's hard in a market in which employees are like auctioneers, selling themselves to the highest bidder.

And college graduates sometimes have skills in Web-site development and other areas that older workers don't. Some businesses have even done away with rigid pay scales to cope with the disparities, Mahadeva said. "If they make too many lawyers, they find themselves having to promote people who don't need or deserve to be promoted in order to pay them more."

Pay equity isn't an issue for Hudson Belk sales associates, who take home sales commissions, said Mike Thompson, manager of one of the chain's department stores. The store pays employees 20 to 25 percent above minimum wage, plus commissions. Workers who refer people for job opening are rewarded $50 once the new associate finishes training and another $50 after the new associate has worked 60 days.

"Some (workers) can make more than others" because of the commissions, Thompson said. "You have to pull from your base of customers. You could have someone new come in who's just dynamite, and they could earn as much or more (than other workers)."

All workers should make sure they are marketable, no matter how highly recruited they are today, said Mahadeva, the recruiter. Younger workers making fistfuls of money should remember to keep their skills updated in case they want to transfer to a different industry one day, and older workers should do the same to avoid becoming obsolete.

Particularly in technology, young workers may only be hot for the moment. Next year and the year after, new graduates will be pouring out of colleges with more up-to-date talents, marketing their skills to companies that would rather hire young than retrain.

"(Workers) need to consistently go back to school and learn new skills and force themselves to stay current on new technology," Mahadeva said. "Many older people have climbed the ranks into management, and they have abandoned doing things hands-on. I think it's real good to have a backup strategy. It's a matter of survival."