Shooting for the top range - the IT salaries explosion

In Europe, the Pay Transparency Act went into effect on August 1st, 2022, requiring employers to include a salary range in all job posts. Pay transparency has set the stage for a new age of recruiting and hiring. It brings hope for pay equity, breaks the taboo of pay talk, and helps workers get a clearer picture of where they stand in the talent pool.

With salary disclosure laws spreading across the globe, changes in both the way employees approach new working opportunities and in the strategies companies use to attract top talent appear. According to a survey conducted by Glassdoor, a company disclosing pay information is a selection criterion for 63% of employees. However, only 19% of employees say their company discloses salary ranges internally among all employees.

The new laws are also changing how candidates talk about their salary expectations during interviews, and bring a new facet to negotiating salaries where “the burden is now on the employer to determine the pay range, rather than the employee to initially voice an expectation, which levels the negotiation playing field.” (Lulu Seikaly, senior corporate attorney focusing on employment law at Payscale)

But while these laws were long-awaited and have several benefits to prospective candidates, they also introduce new challenges.

In this article, we would like to touch on a series of topics that rise from the pay transparency movement and discuss aspects of the current situation in the tech market from multiple perspectives: of the hiring managers, the candidates, and the recruiters.

1. The Pros and Cons of Pay Transparency

2. Being approached for a job vs. getting an offer

3. New talent gets paid more

4. A word on the self-serving bias

5. Compensation in the IT market in 2023

6. Remote compensation strategies

1. The Pros and Cons of Pay Transparency

The spark that started this article is a scenario recruiters encounter quite a bit. It often happens that candidates consider an individualized LinkedIn approach that contains a salary range, to be a job offer. Thus, they set their expectations based on the range they receive and tend to self-evaluate as qualifying for the upper range. But from our experience, the upper range is usually only applicable to 1% of the pool we’re targeting. Suppose we’re recruiting for a senior position, that 1% would be represented by seniors that in reality are at the skill and knowledge level of a principal software engineer or architect.

It looks like we started with the Cons.. so let’s continue this way :) We’ll make up for it soon.

Another downside of salary ranges being showcased on job descriptions is that it creates an overall suspicion of being underpaid. Receiving many approaches from many different parts, including budget information, can have the effect of workers increasing their financial expectations in a non-realistic manner. According to Payscale’s analysis, 57% of people who are paid at market believe they are underpaid, and 42% of people who are paid above market believe they are underpaid. And the study further shows that those who perceive themselves as underpaid represent two-thirds of job seekers.

Source: Payscale Inc ©, The Impact of Fair Pay Perception on Employee Retention

On the bright side, as Ruth Thomas, pay equity analyst at Payscale, explained, having a pay framework and pay transparency fosters a safe space to hold open conversations about where somebody fits within a pay range and the way compensation works in an organization. Rather than individuals having to negotiate into a blind spot, they now have the opportunity to carry out honest conversations.

Another positive way to look at salary ranges is by considering the top range as a testimony that upward mobility is a possibility. Most job seekers, if going through an accurate self-evaluation, will find themselves falling in the middle of the range, but the higher end can be a motivator towards evolving and growing in that company.

2. Being approached for a job vs. getting an offer

Tech professionals are constantly approached by recruiters with endless job opportunities. They already know the deal - a recruiter is looking for a specific profile, finds several fits for the role, and approaches them with a short summary of their proposition. But the Pay Transparency Act introduced a new dimension to this approach, that might leave some professionals confused. The salary range provided in the initial message or phone call is not an offer. It is not an ultimatum and shouldn’t be viewed as an end all be all.

The salary range is meant to include rates for all levels of experience, and in some cases, as described before, candidates might get fixed on aiming for the top end of it, despite not having the credentials to qualify for it.

However, there are also cases, where the upper limit might not apply to a professional. We encourage tech candidates to carefully analyze the opportunity we present to them, the specificities of the role and of the company and to evaluate their fit and their desire to work on such a project. If the salary range is not far off what they are expecting, looking beyond it will help them better position themselves in regard to the role and leave some space for negotiation.

Ultimately, each individual knows best what they can bring to the table and what they are looking for in a work opportunity. Figuring out if there is a place for negotiation starts with a quest for values, strengths, aptitudes, and nonetheless, a quest for understanding the market. A survey conducted by Glassdoor highlighted that “7 in 10 employees (69%) wish they had a better understanding of what fair pay is for their position and skill set at their company and in their local job market.” Negotiation starts with being able to place yourself on the spectrum of the market and it is the responsibility of all job-seekers to have an objective view on this matter.

3. New talent gets paid more

The above section was more from a recruiting/hiring point of view, but we feel like it is our responsibility as well to touch on the employees’ side of the story. Pay transparency ends all the guesswork in regard to new colleagues. As an employee, you are well aware of what new talent is going to get. In the Linkedin post below, Robert Sweeney, CEO and founder of technical recruiting firm Facet, seems to describe a fairytale when talking about his experience as a software engineer at Netflix: getting a raise to match the salary that a new engineer negotiated.

But unfortunately, this is not the situation for many of the loyal employees who stick with their company through the highs and lows of the unpredictable tech market. With pay transparency as the new norm, many employers showcase generous pay ranges to attract top talent. On average, new hires earn more than current employees in similar positions, and the pay gap is higher for in-demand jobs in tech and finance. People ironically say that these employees pay a “loyalty tax”, or in more official terms, this situation is called “Pay Compression”, and refers to employees having little or no difference in pay despite factors that should make a difference, such as seniority, experience, or skills. Of course, this phenomenon creates tension in the team and negatively impacts employee retention, and it’s been already discussed time and time again how putting time, energy, and money into recruiting somebody new is way more taxing than investing in retaining existing talent and helping them grow.

What employees should know is that “There’s always a budget, even if you don’t know what it is” (The Pragmatic Engineer, 2022). Larger companies usually set performance calibration meetings to set budgets and criteria for what type of performance should be rewarded and in what way. Performance management will help a company identify who’s a top or low performer and is the “necessary evil” for any healthy organization. A structured process of gathering and sharing feedback in a formal way about people’s capacity to meet expectations keeps favoritism, injustice, or even pay compression, at bay. But even with a structured process, compensation is still going to be different for everyone and boils down to one’s negotiating skills. Which is desirable! Why? Because everyone being paid the same and having identical raises is the starting point for an ugly scenario - top performers feel like they are treated unfairly and look for opportunities to leave, while low performers stick around.

Both pay compression and the feeling of uncertainty around the possibility of negotiating one’s compensation can contribute to current talents’ desire to leave. No wonder a survey conducted by Glassdoor found that “More than half of employees (56 percent) feel they must switch companies in order to obtain any meaningful change in compensation.” It is time to recognize the shared responsibility for fair compensation - on the company’s side, to instill honest performance management processes, and on the employees’ side, to be self-aware of their abilities and negotiate accordingly.

4. A word on the self-serving bias

In line with some candidates aiming for the top range, regardless of their ability to justify so, we want to introduce a psychological concept that refers to the constant positive evaluation of self beyond external factors to sustain it. The self-serving bias is a type of cognitive bias where people attribute their success to personal credit, and accept praise for it, while justifying less desirable outcomes to external factors that are out of their control. This mechanism is protective of our self-esteem, and to a certain degree, we all subconsciously apply it in some situations. Not being aware of it can lead to dissatisfaction and conflict at work, but maybe even more important is to look into why the self-serving bias appears. Beyond the individual factors, there could be one more root cause of self-serving bias: a psychologically unsafe working environment. This could cause over-justification for mistakes, fear of taking responsibility for undesirable outcomes, constant dreading of the possibility of a critique, and being on the look for the next praise.

Does this mean that any candidate shooting for the top of the salary range has self-serving biases? Not necessarily. Of course, many factors contribute to doing so, including the desire for better opportunities and better quality of life, as well as an inner knowledge of what their potential can bring to the company under the right conditions and motivators. But, understanding the self-serving bias and knowing how to identify this tendency, can help hiring managers to evaluate the cultural-fit to their company and prevent these patterns from affecting workplace performance.

5. Compensation in the IT market in 2023

Usually, annual raises are not that interesting for software engineers, and the way to earn more is either by getting promoted or switching jobs, but with inflation spiking globally and reaching the highest levels in 3 decades in the US and Europe, some companies are now offering raises to match the inflation. However, according to The Pragmatic Engineers issue from January 2023, only 6% of the companies are raising salaries above inflation, and they are mostly represented by early-stage companies that currently pay below the market. 36% of the respondents to his survey shared that they will raise in line with inflation, 48% plan to do so below or well below inflation raises, and 10% of companies plan no raises. These numbers apply company-wise, but high performers are still to expect raises that keep up with inflation. On the other hand, “Big Tech companies are issuing stricter guidance and expanding the ‘below expectations’ bracket in performance calibration sessions.”.

In his newsletter, Gergely Orosz, the author, encourages engineering managers to be prepared with answers to questions in regard to the new compensation numbers, such as “Why is my raise below inflation?” or “How were raises decided this year? Was high inflation taken into account? If not, why not?”. These conversations need to take place and will foster psychological safety in the company when met with empathy and authenticity, and managers should know the ins and outs of the budget allocation decisions in order to facilitate an open dialogue.

The decreasing budgets in 2023 set up the ideal time for startups to attract and hire top talent and do so at more affordable rates. Following the same line of thought, SignalFire’s State of Talent Report mentions startups actively recruiting passive talent who survived the layoffs and integrating these software engineers with exceptional performance and experience into leaner teams.

6. Remote compensation strategies

The topic of compensation can be a bit sensitive when addressing remote work, which, at the same time, is slowly but surely becoming the norm. Location-indexed and location-independent salaries play a big part in remote compensation strategies, but is one better than the other? Or are there any other solutions to approaching remote compensation?

The Pragmatic Engineer (2022) in collaboration with Sergio Pereira, CTO of remote teams for 6 years and contributor to Remote Work Academy, explained remote compensation strategies in detail if you’re looking for an in-depth approach to this topic, but for now, we will summarize 3 essential takeaways from this newsletter.

1. Location-indexed salaries: this means software engineers are paid based on their location, taking into account the cost of living. This strategy tends to cost less and is especially attractive for early-stage start-ups. On the downside, it can be unpopular for employees living in expensive cities and choosing to relocate, because their salary will change accordingly.

2. Location-independent salaries: this means equal salary for the same role regardless of location. It is based on the principles of equality and fairness but can be more expensive for companies, and sometimes less attractive for workers living in expensive cities.

3. Salary is equal, but currency, taxes, and holiday time are location-indexed - here, companies decide on which variables to equalize. There are a few options. The first one would be prioritizing equal cost for the company, with take-home salaries differing between countries and regions. The second option is to offer equal gross salaries, this means significantly higher costs per employee for the company as well as some differences in the take-home salary. Lastly, companies can decide to opt for equal take-home salary - not a practical option, but interesting to use as a simulation to understand how the total cost for employment is different in various countries.

Finance and Tech go hand in hand and the high salaries in the tech market are influenced by a bunch of factors: inflation + pay transparency making salary ranges visible for all candidates -> candidates aiming only for the top range -> new talent being hired and paid more than current employees -> loyal talent feeling frustrated -> loyal talent wanting more and leaving -> and the cycle begins again. Add to this the fact that many companies do not adjust their compensation to the level of inflation, because of the uncertainty that describes the global situation since the Pandemic, which makes the market even more dynamic and unstable. And where do you fit the fact that remote working brings up so many possibilities for both companies and candidates, but also several aspects to consider from a financial standpoint? Money is never an easy topic to digest, but now it seems even more complicated…

How can hiring managers navigate these times?

How can tech recruiters and consultants calibrate candidates’ expectations?

What does our database at Human Direct, with answers gathered from hundreds of candidates, say about candidates’ expectations for different roles, and how can hiring managers use that information to recruit the best talent?

We would love to guide you and give answers to all of the above questions and more. Our tech recruitment consultant, Reka has had the opportunity to cover a wide range of recruitment projects (Romania, Europe), she is in contact with candidates on a daily basis and has valuable insights to share with companies planning to build/expand their teams. Here is her take on IT recruitment.

“Since I’ve started working in tech recruitment 5 years ago, it has gradually gotten more difficult. Different events disturbed things at the point when one would have thought “OK, I think I figured things out”. The secret is being able to reinvent practices and approaches and being able to adapt to all the changes constantly happening.

My personal touches within projects are complete transparency and consistency in what I do. I always try to gather all the relevant information (besides a Job Description) that could help people make a decision to say Yes/No to a proposal before I even approach them. It seems to be working right now - I get many positive feedbacks from candidates even if it sometimes comes hand-in-hand with a negative response, because the meaningful parts are still the human approach and the relationships we manage to build.

Throughout my 5 years working in this domain I see certain patterns and trends that could be helpful information to any company planning to build or expand a team right now.”