Thursday, November 26, 2009

Do Employees Deserve Raises Commiserate with Inflation?

 Musing of an Abstract Auclander had a post up in which she argued that "everyone is entitled to at least a raise to keep up with inflation."  I am not sure whether she is making a moral argument or agitating for a legal change, but disagree with both positions.

Morally, nobody "deserves" a raise.  The reason people are employed is that their employer expects to make more money than they would without the person.  Thus the employer's  profits have to be higher than the costs of salary, medical benefits, the state and local government's take (both what comes out of the gross salary and the "employers share" that workers never see), and the administration costs required to keep up with all this.

Smart employers gives raises and cost of living increases to the employees they want to keep.  Smart employees look around at the market and request raises when they feel they are being paid below market and/or find themselves a new job that pays what they consider fair for their work.

In my limited experience as an employer, it is always the people who are slacking off behind your back and then making mistakes through sloppiness (everybody makes mistakes, but after the first month or so, they shouldn't all be of the bonehead variety) that think they deserve a raise and want to gripe about it.  Your real go-getters will demand a raise, get rejected, ask what is needed to get one, and work their buns off to get it.

Raises on demand are for (1) people you have to keep for one reason or another because they are on a critical project (and you may have to fire after they project is over, if they are taking out more value than they are bringing in) or (2) People who have and continue to add such value to the company that it is worth it to give them more money to keep them.

Scheduled raises should ideally be a time when employers look around at who makes the company valuable in ways that should translate into more money for them.  Cost of living increases are a lazy way to give everyone in the company incentive to stay.

In this market, plenty of industries are not making any money at all - they are hanging on to their employees in the hopes of better things ahead, but nobody is making up the cost of their hiring.  In that situation, raises just increase the margin of loss the company takes on an employee, and they rationally aren't going to do it, not because they are bad people and greedy, but because it is management's job to keep the company out of bankruptcy.

This is why I am so worried about the direction that the American administration is going.  With one fell swoop, they are going to mandate that employers get heath care for their employees or pay fines.  Perhaps in better times, companies could absorb the costs (although it would create a slowdown in hiring and increase in job loss by making workers that much more expensive), but right now, when virtually no one here is getting raises, in large part because most sections of the economy are losing money, adding extra costs to be an employer is a good way to get people fired (either as a cost-cutting measure or because the new expense is not sustainable for the company and it folds).  Here in the United States, it is not surprising to me that people aren't getting raises - or getting hired  - employers are waiting with baited breath to see what the government is going to mandate that an employee should cost.

A legal "raise entitlement" would create the same problem.  It would add one more government-imposed cost to being an employer.  It would create an artificial incentive to fire marginal workers, as employers would be required to give them pay raises that moved them from marginal to money sink. It would add one more government roadblock business creation and expansion, as employers looked down the road to the cost increases entailed and decided that the business idea they were contemplating could not sustain it, thus causing the hiring of fewer workers to being with.

In short, nobody is entitled to get raises just because they are working, and a cost of living increase is just another kind of raise.  If an employee adds tremendous value to their employer, and the employer doesn't appreciate it financially, the employee always has the option to find a place where they are appreciated in appropriate financial ways.


  1. Wow, you really did bash out a long reply! Thanks for stopping by.

    To clarify, I meant morally (not sure what you meant by legally, I guess an argument to extend to law to cover mandatory raises?) From my POV as a fresh grad entering the workforce, if the cost of living is going up and income isn't, that's tantamount to a pay cut, and unless an employee is severely underpeforming, that doesn't seem right. Of course, COL isn't the company's fault, and it's also out of the control of the worker. And I would absolutely agree with looking for a better situation if someone was stuck in such a position.

  2. The problem with not having a cost of living increase year after year is that the cost of living does go up. Assuming that the employee is still giving his/her best year after year, the employee actually starts making less money for the same work. Of course the employee can look elsewhere but employers should consider this if they want to keep their employees, the stars as well as those average or above average. Not everyone is a star employee but sometimes you need just enough good employees to make the company work efficiently.