Simple explanation: they saved money. Of course now they have to recruit, and then the new person needs a lot f time to learn what his company does (it's complicated). Cost is WAY more than that 12%, but it doesn't show up on the balance sheet.
So to answer OP's question: because companies don't really value their people.
I think the reason is that big raises are not sustainable over time. If you keep giving your employees 10% raises every year, eventually you can't afford it. So you keep raises to 2-3% as long as possible and only give larger raises along with promotions, or when hiring a new employee.
I was fortunate to find out this pattern early in my career, and I was able to average 18% raises for over a decade by switching jobs nearly every year.
I would add that new hires are seen as solutions to a problem that desperately needs a solution, unlike old employees who are just there doing their work. A company looking for a new hire is not in the same negotiating position as a company that isn't.
Everyone talks about the case where it would have been better to just give the raise to the existing employee, but there are TONS of situations where the company ends up winning instead, and those are never talked about.
However, most employers have no idea how much each employee is worth, especially in engineering. The equation is basically “coder? Ok, add $50k. special coder? Ok, add another $50k. We can’t do too many of those though.”
It’s like, utterly out of touch with the actual business value that people create.
Instead, companies should actually track changes to their business, and then map those back to the person-quarters that unlocked that business.
That’s work though. And it maybe opens you up to political infighting over those attributions.
But I suspect people would be more chill about it if they were getting paid what they are worth.
And, side bonus: you’d find a bunch of people who weren’t contributing much for their pay and save a lot of money by firing them.
Other side bonus: you’d probably eliminate gender and race based pay gaps in your company and drastically increase diversity, with many of the top female and minority workers joining you because you’ll actually pay what they’re worth, not what someone like them is “traditionally” assessed for.
In the end, all of that is probably too scary for most companies. We’d rather just follow some arbitrary rules and know wer’re going to get paid, and put the whole reaponsibility for solvency on the executive team, than to take responsibility for ourselves making a real, traceable contribution to the business.
Hmm. For those curious, assuming I still understand how to do basic math like this and a few relatively low starting salaries for year one:
40k*(1.18^10) = 209k
60k*(1.18^10) = 314k
80k*(1.18^10) = 418k
2012 £200 (first time programming for money)
2013 £300 (new client)
2014 £425 (new client)
2015 - took a year off -
2016 £500 (new client)
2017 £650 (same client)
2018 £800 (new client)
The argument is turnover costs at least as much but probably more.
1. Internal process: the budget/process for promotion and pay raises are probably relatively fixed for mid to large companies, so there isn't much room for managers to navigate even if he/she champions the salary bump.
2. More cynically, there is also friction for an employee to leave their current position (interview, potentially relocate, risk of new job being bad fit, etc). And this friction manifests as the pay gap between market rate and salary. As a corollary to this, for an employee with a competing offer, this friction is removed and the company is forced to re-evaluate the pay. But there may not be anything the manager can do. See #1.
Politically companies "want" to budget raises as a fixed cost and divy up among employees. So they'll try to negotiate against their budget and fixed, manageable raises / promotions. Lots of people will play along.
The logic is insane. Suppose I'm the employee, and selling a car; the company is buying one. I want 10k, the company says, I've only "budgeted" 7k, but will agree to 8k. Meanwhile I have a buyer willing to pay 12k; company says no deal, and instead goes out and pays 15k for the same car. This seems to be how many of these situations unfold. The crazy thing is many employees are willing to stay for less than they can get on the market; but the company just won't do it.
1.) Giving big raises to existing employees often causes morale problems with their coworkers. People talk, and they get resentful if someone who (in their view) is working no harder than them is suddenly getting paid $20-30K more. So giving a big raise to one person usually means you have to give it to all of them. There are mitigating circumstances if you can point to some external circumstance that's changed (eg. "Alice got her MBA", "Bob just led this big project that made us $10M", "Cindy got promoted"), which is why companies are more likely to give raises under these circumstances. By contrast, a new employee doesn't have the gossip networks of existing employees, and the business can often invent a reason why they're being paid more (eg. "David brings special skills that are crucial for us right now", "Erin was hired in at a higher level based on her experience at XYZ Corp.")
2.) Usually the company that hires away an employee for much more money has very different profit margins and revenue growth than the one they were hired from, and so they can afford to pay more. This is the economy functioning as normal: employees should jump from companies that are less productive and less profitable to those that are more productive and more profitable, because their labor will net both them and the company more.
3.) There's a cognitive bias known as anchoring, where people form a mental model of how much a person/security/job/product should be worth, and refuse to update that mental model in the face of gradually changing facts. So if you get hired in as a junior dev fresh out of college at $60K/year, your boss's mental model of you will be "that college kid we're paying $60K/year". But after a couple of years of experience, you will be way more valuable to everyone else in the market than the new college kids coming out now, and your salary will reflect that on the open market - but your boss will still think of you as "that college kid we hired for $60K/year".
The factors feed into each other, eg. anchoring is also why companies don't adopt new production techniques and go into new emerging markets that generate higher productivity per #2, higher productivity generates a qualitative difference per #1 that justifies higher wages, anchoring is the reason why bosses & coworkers are blind to minor or gradual differences in productivity per #1, and social customs of the employees often reinforce old production techniques and prevent them from benefitting from #2.
It may be helpful to think of the rational state of the workforce as always requiring retraining, the rational state of business relationships as always hit-or-miss, and the rational state of the job market as always requiring turnover. And then individual companies create bubbles within them to satisfy human needs for security & stability, because our emotions evolved when the pace of change was significantly slower. Because most people have a bias toward stability, it creates economic opportunities for those who rationally choose instability and throw away their old relationships for more productivity and higher profits.
Even more interesting is how to profit from these incentives as someone who doesn't work for the company. Many highly-visible startup acquisitions happen because a mid-level executive is trying to create highly-visible external accomplishments that justify them being raised up a compensation level.
Roughly speaking, any new equity grant from a company your parents haven't heard of is worth $0 when you join. If your employer is successful, these grants become worth actual money, and that is your effective raise. If not, then you can and should job hop instead for a cash salary increase.
On the flip side, since the new equity grants are worth approximately $0 at signing, employers have to match the actually valuable equity that candidates are receiving with cash salary instead.
There are companies that give sizable equity grants that your parents have never heard of. Equity you could see on a public market that's worth more than $0.
If hiring manager is 'graded's on number of people hired, usually has a decent budget that might dissappear every new fiscal year, and they want to hire you, they will be willing to negotiate :)
On the other hand, your manager might operate on assumptions that you either won't leave because of your pay and if you'd leave you would have left even after you receive a raise.
any way to leverage this in my current job? I'd have to disclose that I was flirting with others...
you aren't holding them over a barrel, but just make it known you know your worth?
sorry if my advice isn't as formed as it should be.
https://www.forbes.com/sites/jacquelynsmith/2012/10/26/the-d...
I might move away and look for a new job. If I don't I can tell them the I'll stay in town but started checking my market value and need an adjustment :)
When the economy is worse and employers can choose, even 3 years look like "job hopping individual, will jump ship as soon as economy turns around and he can get $1 more somewhere else".
Just decide if you optimize for comfort or money, and make sure you have a few months buffer for the bad times.
It's business, they aren't your friends, you don't need to tell them the whole truth.