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Comment by Mikeb85 | Hacker News Reader

For employers it's game theory. If employees are commodities then it's better to keep the pay structure and have X amount of attrition than to pay everyone more to keep attrition low.

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I think I finally figured part of this out. Like you said, employers treat workers as commodities. This worked out great for them in the short term, as they saved money by not giving raises etc. In the long term, though, workers started realizing they often had to go back to the market to get meaningful pay raises. Now you have a situation where workers are switching as often as every 12-24 months, and the thing not previously accounted for is onboarding costs. In a situation where workers stay an average of 5 years, let's say they take a year to become net productive, you're losing about 20% of their time as an investment for 80% payoff. Now, though, that static year of onboarding costs accounts for 50-65% of their entire tenure. That's a huge swing against companies, who are suddenly realizing retention might be a problem. So the economic/management theory that everyone is just an interchangeable commodity is running up against the wall of reality, where second-order effects have taken over and destroyed a bunch of business value that could be captured in a more stable environment.

There's an additional problem that firms are caught in a game theoretic trap. If you're the only firm providing stability, your investments in that in the short term might make you less competitive on pay, which means you'll train up people who might leave seeing higher pay elsewhere. So stability investments might be rational in the long term, but because of market conditions you get killed in the short term, and you end up tempted to abandon your strategy after a few bad quarters where it looks like they aren't paying off.

> If you're the only firm providing stability, your investments in that in the short term might make you less competitive on pay

You're contradicting yourself here. Above you were saying that the way to keep employees is to give them proper raises, and thus enhance stability. How come greater stability equals less competitive pay?

Yeah sorry, I was writing it on the fly right before a meeting and just dumped my thoughts out. I think I was thinking something like this:

If you spend money internally on promotes, you'll have less money to compete in the market for new hires. Therefore you might get some indicators that things aren't working, for example you might lose out on desirable candidates in the short term. Also retention might be a lagging indicator, because maybe some of your people already have their foot out the door, so it may look like people are continuing to leave in response to the old incentives before they realize things have changed.

Ideally you exist in an organization where everyone is on the same page about your strategy and anticipates those kind of negative indicators, but maybe understanding is fragmented and a bunch of stakeholders push back when they see those negative signals.

> you'll have less money to compete in the market for new hires

Why would that be the case? We already established that the company would pay industry level salaries to new hires and existing employees alike. Moreover, because you have less turnover, you need to hire less, so you have less wasted money on hiring and training.

All in all, I just fail to understand why companies don't value existing employees more. I think it's the fact that they take advantage of people's aversion to change and interviews. They rely on people NOT going to interviews.

It's all relative, though. If you increase salaries for retention, it has to come out of some other pot. Maybe that isn't your new hire pool, but you're going to see a negative metric of some kind somewhere. Now don't get me wrong, I still think it's better in the long term. But my point is that you'll get some kind of negative signal by pulling back funds elsewhere, and a firm at that point has to have the discipline not to freak out and stay on course.

If you're correct, and it costs more money to keep people, then we are wrong: it's not cheaper to go for stability.

Maybe it's like in the prisoner dilemma: you can't go lower than the market peak because no-one will come to you, even if you offer more on average than the industry average. This way, we reward the job hoppers with the peak salaries. Peak salaries means over time the average goes up too. I guess it's how free markets operate.

It depends on how retention interacts with other variables. I would argue that you can make exponential gains in things like product quality over the long term by retaining a critical mass of experienced personnel, which translates to higher earnings etc. But yes if you view personnel costs as a line item in isolation and on a quarterly basis, you might not see those effects.

>In the long term, though, workers started realizing they often had to go back to the market to get meaningful pay raises.

This has always been known. There simply was less demand for the labor that some workers were selling to get meaningful pay raises. Now that those supply and demand curves are shifting, especially in favor for those at the bottom of the pay scale, they have the option of selling their labor at a higher price.

I am curious how it turns out in the next few decades as lower birthrate effects cause younger, lower paid workforce numbers to decrease. Especially if it is not offset by labor from immigrants.

Completely agree. At this point I'm relatively convinced you always have to go "back to the market" to get a meaningful pay raise. Even if you switch to the product side or make 2-3 compensation incentives, you're likely not going to see that much of a cumulative pay bump - especially if you're not in the top 1% of engineers (which I certainly am not). Once you're in the 6-8yrs of experience range it gets a bit more drab unless you want to start your own gig - that is of course if making more money is in the cards.

> let's say they take a year to become net productive

That's some crazy long time for becoming productive. Do you have any examples of the kind of projects where this would happen? As a freelancer I expect myself to be productive within a week, preferably from the second or third day onwards with smaller tasks. May be that I'm finding just easy projects.

The "$9,000 to keep" figure is the cost to keep a disengaged worker on top of their salary. This is the 18% of lost productivity against a $50k average salary. (Which suggests $50k of value creation in a given year dropping to $41k.)

The article doesn't address pay as a way to increase engagement—and thus decrease attrition. Indirectly, the article suggests that increasing pay wouldn't actually have that much effect, with the real benefit coming from managers "who give workers a sense of purpose, inspiration and motivation to perform".

Mathematically, you would need every 2% of average "retention" raise to yield a 1% drop in retention rate to break even, notwithstanding that 18% productivity drop.

Put another way, it's not about employees being commodities. It's about (generally) pay-for-retention programs NOT ONLY failing, but in the worst case negatively affecting those people who are engaged by forcing them to continue to interact with disengaged people who decided to stick around a little longer.

But if employees are commodities and companies can get away with thinking that way, that number is either inaccurate or everyone is getting it wrong.

I mean, I'm not these companies and I don't know the exact formula, but you'd be looking at things like the attrition rate, the cost of hiring, the cost of raises but also the value of wages across the whole market. There's some low-key collusion going on for sure (not necessarily outright collusion although some firms have been caught doing that too, but multiple firms all employing the same strategy keeps wages low for everyone). Now obviously developers do have enough leverage that they earn more than many professions, but it's obvious that many are under-valued.

If it truly were more expensive to hire than to give raises, more firms would be giving raises.

> If it truly were more expensive to hire than to give raises, more firms would be giving raises.

I don't disagree but the real world is more complex. Recruiting is an entire department in most companies that have a vested interest in hiring from outside. They will pull all strings to keep getting money for hiring.

Corporate structures are really inefficient

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