Sydney Allen-Ash, Co-Editor of Early Magazine: So, what’s going on in the economy?
Trisha Neogi, Compensation Lead at Bright + Early: What isn’t going on?! I think it's important to start off with the history of compensation in Canada and the US. Starting in the industrial revolution era, labourers had to essentially unionize to get paid fairly. That's why, in the 1900s, you saw really strong unions forming and people were actually getting paid based on what they were doing for work. They had actual benefits that would sustain their lifestyle, and their salaries were getting increased relative to cost of living. But then we got into the 80's, which was free market capitalism like, "Everyone, go get your own." And that's when we saw corporations starting to fear unions.
Then there were a bunch of bills passed to allow for companies to do anti-union spiels and we started seeing the decline of unions. I think this is really important because when the unions started declining, that's when you started seeing the gap of wages. That's when companies weren't mandated to increase salaries based on cost of living. Shareholders became the top priority, so costs were reduced to inflate the bottom line. Benefits started getting reduced, salaries were no longer competitive, and the economy at that time was all about the free market. Low-wage labourers started becoming even more low-wage and then you get the 1% actually becoming the 1%. That's where we are now, where we have billionaires versus Uber drivers that are not being paid minimum wage.
But then you tack on the crisis that we've just been through over the last three years with COVID and social injustice. And then on top of that, war and inflation and interest rates going up and, ultimately, employees are just tired. Our wages are essentially comparable to what standard of living would be in 1970 or 1980s. So, of course employees are going to be like, "I can't do this. I have to go somewhere else that will pay me more,” which is the Great Resignation.
From a business owner point of view it's tough for early stage companies because they just don't have the resources to match cost of living because they’re behind. Companies are behind paying their people correctly. Now it's a push for getting everything up to market, but it's a huge, huge cost for especially startups. I can see both sides of it, but that's what's going on. It's messy.
Syd: And then you have everyone talking about a potential recession. How does recession factor into the compensation challenges faced by employees and companies?
Trisha: So the thing about salaries in a recession is that the market rate for a salary doesn't really dip when a recession happens. It's abnormal to reduce someone's salary because of a recession. What is normal, though, is freezing salaries because there's no economic growth. I think what's different about this time period is that there’s a huge saturation of early stage companies that are all product-based, and there's not the disposable income available to drive their growth. I'm personally curious to see what's going to happen to those companies. There are other industries that are doing really, really well, but for the industries that rely on consumption, I think you're really going to see them hit a lot harder.
But based on what we've seen in the past, I don't think salaries necessarily will be cut. And I also would never recommend a company to do that either because you can get into a bunch of laws with that.
Syd: Is it normal for employers to lower the starting salary for roles they're hiring for during a recession?
Trisha: That's such a good question. It depends. So let's say we're talking about an ideal company that has their shit together. They have a compensation philosophy, and their compensation philosophy says that they're going to pay at market rate, that means they're going to pay at 50th percentile, the market average. If they're not committed to a philosophy or they don't have a philosophy, I can see why it might be an easy decision to lower starting salaries. However, that becomes a pay equity concern because you now have internal employees at the same level making $50k but then bringing on new hires at the same level at $40k. Now there's pay inequity which potentially puts you at legal risk in Canada. You're also opening the doors for major retention issues if word gets out, and you should expect that to happen because everyone talks about their salaries.
Syd: Then the other thing that we see employers doing in response to the current economic moment is hiring freezes and layoffs as well. Those are pretty standard in this situation, right?
Trisha: Unfortunately, yes. However, we're technically not in a recession yet, so this is all early stage, but the newsworthy layoffs we're seeing, in my opinion, seem to be more "strategic layoffs." From what I'm observing, it seems like the companies that "proactively" hired for the areas they wanted to explore, or hired more folks in roles to support demand may have realized that the market wasn't going that way, so they laid those teams off.
Syd: So, you think partly the layoffs that you see now, maybe specifically within tech companies, are strategic decisions being walked back under the guise of prepping for a potential recession?
Trisha: Yeah. And I know that's very controversial to say, so I'm not going to say names of what companies are doing that. But based on what I'm reading and what I'm seeing, I feel they’re calling it a layoff, but the teams that are being laid off are new teams or teams that are maybe becoming obsolete in that specific company.
Syd: So, it's not necessarily nefarious, just bad timing or poor foresight. But, again, we won't name names. What else should employers be aware of when it comes to recessions and compensation?
Trisha: Well, I mean, everyone freaks out. But that's why it's really, really critical to have a compensation philosophy as your grounding north star. Because in situations like this where the economy is so uncertain, you don't know what's going to happen. But when you can align your decisions back to the fundamentals of your compensation philosophy then you at least can explain it to employees and help them understand your decisions.
Also, don't cut your benefits. Don't cut your perks. Don't reduce your vacation. You're not going to save that much money, maybe $1,000, but what's going to happen is that you are taking away fundamental things that are important to your team and that's going to cause retention issues. My advice would be get really, really clear and strategic about how you pay your people. And like I said, it doesn't have to be super complicated, but it needs to be education-first and well-informed and bring your people along so that they can also be educated.
A question that I often get asked from employees is, "Inflation's at 8%. I feel like my salary actually hasn't matched. Am I getting a pay cut because we didn't get a percent increase?" I think what’s important to understand is that, legally speaking, companies don’t have to give an increase in relation to cost of living. Remember the unions that used to protect us? Because companies don’t have the same level of accountability as they did when unions were more common, many choose not to align with real time cost of living changes. Instead, companies have been following the “market rate” or the market average. The average is determined by supply and demand and cost of living all in one. Since the market rate is based on the market, if companies are not giving the full 8% increases, the market won’t report it. Basically, if the majority of companies started to align wages to actual cost of living data, the market rate would increase and salaries (in theory) would match actual cost of living.
Syd: Have you heard of any employers doing the full 8% cost of living increase to match inflation?
Trisha: Not yet. No.
Syd: I feel like that would be a really quick decision to make. It's halfway through the year and to have a company completely pivot and choose to increase everyone by 8% — that would be great, I would love that — but it seems like an unrealistic ask for companies that normally adjust compensation on an annual basis.
Trisha: Totally. And I'm glad you mentioned annually because this is where I hope to see change. I would love to see companies take on a semi-annual compensation approach. And it's not to say that you increase salaries semi-annually, but it's that you are formally checking semi-annually so that you now have consistent records of trends that are happening. Like, inflation now is 8%, but what if inflation goes down to 6% by the end of December? By keeping on top on the market trends you can budget for that gap versus being constantly reactive.
Syd: Okay. So that's the employer side of things. What about the employee side of things? What do you think employees should be doing right now? What should they be advocating for?
Trisha: I think pay transparency. Basically, I think employees should unionize or get on board with pay transparency and really advocate for that. I'm not saying you need to know the salaries of everybody, but you should know your pay band and you should know where you fall within your pay band. But that's not going to happen overnight. If a company doesn't even have a compensation philosophy, it's going to take them a year, probably a little more to get that shit together. But advocating for that transparency is really important.
Syd: How would pay transparency help you navigate this current moment?
Trisha: It makes you more informed because, once again, at the end of the day, we can't control inflation, but we can make the best financial decision for us if we know our pay band is X amount and where we fall in the pay band based on your own circumstances. And I think when you give the power of information to people and they have the autonomy to make the decision, it's less of a burden. Also, it's less of a burden for the company too, because now you're not getting angry employees being like, "What's going on? Why aren't you giving me a raise?" The company more clearly explain their decision-making like, "This is what we have and that's that."
I think what a lot of companies don't leverage is that, especially in startups and early stage companies, you have hired a bunch of people that are really aligned to your mission and really care about what you're doing. You're intrinsically motivating them already, they're going to stick around. But they usually start leaving when they're smelling the BS. The moment you start hiding things from them, they're going to catch on pretty quickly because of course, you've hired smart people. So, be open with them and show them how they're being paid. You don't have to have all the answers in place, but show them as you make decisions and educate them. And they will probably stay with you, unless it's an egregiously low amount and they literally can't afford their life, then that's a different story.