A rapidly expanding economy, the militancy of labor unions and employee scarcity drove labor costs higher during the last half of the previous century.  As the power of the unions declined along with union membership, pressure to increase salaries weakened and workers sought additional benefits in lieu of salary.

It is not by accident that as union representation in governmental agencies increased, so did salaries in these areas go up at a rate greater than in private industry.  At the same time, benefits have also gone through the roof in these areas while actually declined in real numbers for the private sector.

In the past few years, wages have remained fairly static while workforce members and employers have sought other means of compensation.

For smaller employers, this trend has meant less pressure to pay employees higher wages but increased demands for other forms of compensation, primarily healthcare and pension offerings.

Healthcare costs

With healthcare premium costs soaring, smaller employers have sought means of reducing these costs.  What is dominating the small and medium size company planning programs have been efforts to shift more and more of healthcare costs to employees.

Troubles at General Motors and other major corporations and “give backs” by these previously intransigent unions have made these efforts more prevalent.

With the advent of Consumer Directed Healthcare (CDH) and such programs as Health Savings Accounts  (HSAs), efforts to change the payment mix grew.

Surveys performed by Information Strategies, Inc. (ISI) indicate that fully 25% of all small firms are expected to offer HSAs in 2007.  Currently, almost half of all small firms under 250 employees do not offer healthcare insurance, according to ISI.  More than 15% of these firms are expected to offer some form of CDH insurance in 2007.

If this projected outlook proves correct, employees will see more of their salaries being taken up by healthcare costs.  As this trend takes hold, many employees will begin to demand additional compensation to make up for the loss in after tax dollars.  This trend will generate a growing perception amongst employers and employees that compensation will become more a joint undertaking and pressure for increased wages will grow in 2007.

According to Dr. Kenneth E. Lehrer, a Houston, TX, economist who has been following this area, “pressure for added wages will grow through 2007 as the inflation rate, held in check for the past five years, increases, compensation hikes will be on the table for many smaller employers in 2008.”

Perhaps the single most important pressure on compensation has been the adoption of IT products in companies.  As the count per employee moved closer to one, companies began changing their approach to compensation in terms of skills and job description.  Younger workers with a greater familiarity with IT usage replaced many older workers in lower level positions.  With the loss of older workers, and their higher salaries, came a diminishing of corporate “lore” and a homogenizing of applications.

Coupled with the growth in service industries as opposed to skill-based offerings in manufacturing and other “heavy industries,” compensation patterns have changed.
At the same time, IT application development and deployment has become a dominant industrial sector with compensation favoring “mind-based” rather than “muscle-based” skill sets.

The resulting breakdown in compensation patterns has left a divide in American industry that is going through a severe dislocation in terms of organizing and managing the workforce.

This generational shift has forced severe changes in how management approaches the recruitment and managing of these new workers.

The “Dot-Com” boom made instant millionaires of many young people and raised salary expectations as well as benefit mixes.

It is not by accident that starting salaries for MBA graduates from elite schools became a bell weather on salaries, rising and falling in line with the growth, stagnation and now resurgence of IT applications, particularly through the Internet which has significantly reduced the number of support positions required to run smaller enterprises.

Global Competition

Another deflator of compensation growth is the rise of the global economy.  It has made smaller companies more sensitive to the need to keep salaries in check.  At the same time, off-shore sourcing has reduce the number of openings available to many Americans.  The rapid dislocation of industrial companies to other countries as well as many service oriented functions that can be accomplished through Internet and telecommunications-based applications have also added to this changing compensation landscape.

Regulations requiring reporting programs and protection of specific classes of workers have also added to the difficulties of managers in setting and maintaining compensation programs.  These regulations have forced companies to be particularly careful in the management of individuals by reducing the flexibility of managers.

As the boomer generation approaches retirement age, small and medium-size companies in particular are facing a daunting challenge.  Older workers tend to be more loyal, have a greater sense of responsibility, and tend to be more efficient than their younger counterparts.

At the same time, these older workers see comparative newcomers receiving pay and promotion opportunities denied them.  Coupled with perceived regulatory requirements that seemingly boost younger workers, this driver is becoming more visible in the workplace. 

Large corporations have wiped out whole generations of middle managers creating a dislocation in pay where the senior management is often times paid significantly more than the average employee.  Experts point out that the differences between the lowest and the highest paid employee has grown from a ratio of 12 to 1 to 48 to 1.  The recent scandals on executive option pay has caused severe employee morale problems at several large corporations.

Within smaller companies, this disparity has not been as severe but the media attention to salaries of senior officers has put pressure on companies to realign salaries.

The injection of large numbers of women into the workforce in the last part of the prior century resulted in many changes, not the least in the compensation area.  As pressure grew to equalize pay amongst women and minorities, compensation programs became more complex and subject to additional regulatory oversight.  This in turn led to greater pressure on salaries, eased only by the changing nature of the global trading patterns.

Americans are still amongst the hardest working people on earth.  Compared to other industrialized countries, Americans spend more time at their jobs than any comparative culture. 

At the same time, they are evolving as to their commitment to their jobs.  The sense of responsibility and “getting the task done” is slowly eroding.  One merely needs to deal with any local, state or federal employee to get the sense that work is the time between other pursuits.

Recently, Microsoft announced changes in its workplace that amongst other things provided free towels in the workout places provided.

When this “perk” was announced at company meetings, it drew more positive responses than a new option plan.