The Salary Sage

Bay Area Healthcare Salary Growth Slows for Third Straight Year

Since 1995, I have been conducting an annual salary survey of the largest hospital in the San Francisco Bay Area. Although the participation varies somewhat from year to year, most years it includes the following organizations:

• Alta Bates/Summit
• California Pacific Medical Center
• El Camino Hospital
• Kaiser Permanente
• Lucille Packard Children's Hospital at Stanford
• Mills-Peninsula
• O'Connor Hospital
• Seton/Coastside
• Stanford University Hospital
• University of California San Francisco Medical Center
• Washington Hospital

Because this survey has been going on consistently for 15 years, it permits an interesting glimpse into trends in health care compensation. The table below shows overall market movement for clinical, administrative and support jobs during each of those years.

YEAR	ADMIN	CLINICAL	SUPPORT	ALL JOBS
2009	2.8%	3.4%	2.8%	3.1%
2008	5.5%	5.6%	4.1%	5.3%
2007	5.6%	7.9%	8.1%	7.3%
2006	4.2%	2.4%	3.5%	3.2%
2005	(1.2%)	(0.3%)	2.8%	(0.1%)
2004	10.3%	13.6%	7.7%	11.5%
2003	1.6%	3.0%	6.9%	3.2%
2002	2.4%	5.6%	2.9%	3.9%
2001	9.8%	12.5%	12.4%	11.9%
2000	2.0%	4.6%	(0.6%)	2.2%
1999	2.1%	2.2%	(0.3%)	1.5%
1998	2.8%	3.5%	2.9%	3.3%
1997	3.0%	2.4%	2.5%	2.7%
1996	4.1%	4.4%	3.1%	4.2%

Even more interesting is the graph of market movement for all jobs. It clearly shows both the volatility of the Bay Area pay market, as well as the recent downward trend. Click the link below to see the graph. Note especially the trend over the last three years.

Download Bay Area Health Care Salary Graph

Forget About CPI When Budgeting Salary Increases

It is that time of year when clients start asking me how much they should budget for salary increases in the New Year. I dread those calls. If I give them the number they want, I am doing my part to contribute to wage inflation and run-away salary costs. And if I slow down and try to explain the complexity of the situation, their eyes glaze over and I can sense them thinking "I ask him for the time, he tells me how to build a watch."

In a recent entry, I explained in detail the pitfalls of blindly increasing base salaries every year just because everyone else does. See The Peculiar Inflationary Bias of Salary Surveys. In this entry, I will go the the next step and explain why you also don't want to blindly increase base salaries because of an increase in the Consumer Price Index (CPI).

Let's take CPI out of the equation once and for all. To do this, let's begin with an explanation of what the CPI is (and is not).

WHAT IS THE CPI?

According to the Bureau of Labor Statistics (BLS), "the CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." It includes several hundred specific items organized into the following eight major groups:

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

• APPAREL (men's shirts and sweaters, women's dresses, jewelry)

• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);

• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories)

• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services)

PROBLEMS WITH THE CPI

While the CPI is a convenient way to monitor changes from year to year, it does not provide a completely accurate estimate of the cost of living. There are four common criticisms with the index:

1. More Than One CPI  -- First of all, there is not just one CPI. True, they are all produced by the BLS, but one glance at their websitereveals dozens of different CPIs based on different geographic regions, population groups, and consumer goods included in the calculation.

2. Substitution Bias -- The second problem with the CPI is substitution bias. As the prices of goods and services change from year to year, they do not all change the same amount. Purchasing habits change based on the relative price of the items. But since the items measured by the CPI are fixed, it does not reflect consumers' preference for items that increase less. For example, if the price of shoes doubles while the cost of apples goes down, a consumer would likely purchase more apples and fewer shoes. This phenomenon of substituting lower priced items for higher priced items is not accounted for by the CPI.

3. Introduction Of New Items -- The third problem with the CPI is the introduction of new items. New products are produced constantly and despite their popularity it takes years for them to be included in the CPI market basket. This flaw is compounded by the fact the these new items often go down in price over time which, if they were included, would actually decrease the CPI.

4. Quality Changes-- The fourth problem with the CPI is that is does not handle quality changes well. When an item in the fixed basket of goods increases or decreases in quality, the value and desirability of the item changes. For example, cell phones keep getting better every year even though their costs are coming down (the iphone is a perfect example). This contributes to an increased quality of life even though the cost of living hasn't changed.

RELATIONSHIP BETWEEN CPI AND PAY

In its explanation of the CPI, the BLS explicitly states that the CPI is used as a "deflator of other economic series." This is code-speak for "your earning power goes down when the CPI goes up." Even though companies make decisions about acquiring talent using many of the same factors that individuals use when they shop for products (i.e., quality, reliability, availability, performance, style, etc.),  the markets for talent and consumer goods are entirely different markets.

While it is true that a person might not be able to purchase as many things in a year when the CPI goes up and their pay remains the same, the REASON their pay did not change has nothing to do with this fact. A person's pay should go up because:

• The knowledge, skills and abilities REQUIRED TO DO THE JOB have increased
• The VALUE TO THE COMPANY of the knowledge, skills and abilities required to do the job have increased
• The knowledge, skills and abilities of THE PERSON IN THE JOB have increased
• The SUPPLY AND DEMAND dynamics for the job have changed
• COMPETITORS have increased what they are willing to pay for the job
• The COMPANY can afford to pay more
• The RESULTS achieve by the person in the job have added value to the company

The cost of living is not, and should not be part of this list. The CPI is an independent variable, like the weather. Just because we experience a hot summer doesn't mean salaries should increase to pay for more air conditioning.

I am not sure why employees assume they can remain the same year after year and earn more money simply because circumstances around them change. And I certainly don't understand why companies would perpetuate this myth by increasing salaries every year. In 2007, the CPI increased 4.1 percent. And guess how much salaries went up? Yep, about the same amount. Employees can scarcely be blamed for inferring a connection when the two amounts are so similar in any given year. Interestingly this year will be a bit different. Due largely to the high price of fuel, the CPI is projected to increase 6.2% while salaries will go up around 4% again.

THE PERFECT PAY PLAN

When it comes to creating the Perfect Pay Plan, forget about tracking the CPI and eliminate automatic annual salary increases that bear a strong resemblance to the CPI. Encourage employees, instead, to increase their knowledge, skills, abilities, and to generate results that are valuable to the company. Pay them more when they accomplish these things. If you do, you will not only be stimulating the right behavior, you will break the cycle of paying more money every year while receiving nothing in return.

The Peculiar Inflationary Bias of Salary Surveys

In this blog, I try to touch on important aspects of compensation that are easily overlooked. Many times, these seemingly minor points have major impact. Have you ever heard the saying "there are lies, damn lies, and statistics?" Well, today we look a one branch of statistics, salary surveys, and investigate their role in creating salary inflation.

Years ago, before anyone ever thought of conducting a salary survey, each company decided for themselves what a particular job (and person) was worth. They raised employee pay when they could afford it, when competitors began picking off their talent, or when employees demanded it (often through labor unions).

Pretty soon, companies started sharing information to get a better handle on pay practices. Allegations of price fixing soon followed, and the Justice Department and Department of Labor established ground rules covering how this information could be gathered and disseminated.

Eventually, published salary data became available for virtually any job, industry, or geographic region. Companies found this information useful and convenient and, over time, became more and more dependent on it for establishing salary levels.

Gone were the days when each company decided for themselves how much a job and a person were worth based on skills, performance, importance to the business, supply and demand, etc. Instead, they could open a book and just look up the right number to pay a particular job. And today, in most cases, this is precisely how it is done. "Market pricing" has become a sacred mantra among compensation professionals.

If you are particularly lazy and cheap, you can get this information free over the Internet. If you are more conscientious, you might purchase a survey from a reputable consulting firm. And if you are extremely diligent, you hire someone like me to design and conduct a custom survey just for you.

But no matter how you gather this information, there is a dirty little secret about salary surveys that I have never heard anyone (except me) discuss.

LETTING THE CAT OUT OF THE BAG

Salary surveys are a scam. These are harsh words, but I am willing to stand behing them. Here's why. The scam has nothing to do with the surveys themselves, the data they contain, the way that data is gathered, how that data is presented, or the companies that provide it. The scam is how the data is USED. Here is an example that I think will make the situation clear:

1. Company A purchases a published salary survey and, after going through it, comes to the conclusion that several of their jobs are underpaid.
2. Company A increases the pay for these jobs as a result of what they learn from the survey.
3. Company A submits their own salary data to the survey (a precondition of participating in virtually all surveys) which is now higher because of what they learned from the survey.
4. Company B, then purchases the survey and notices that because of the data submitted by Company A, their pay is now low and, in response, increase their pay accordingly.
5. Company B submits their own salary data to the survey which is now higher because of what they learned from the survey.
6. Company C purchases the survey . . .

You get the point. The example is rather more simplistic than the way things actually work, but the essence of the example holds true -- companies increase their salaries simply because other companies have done so. They confuse behaving like lemmings with market dynamics.

Increasing base salaries is supposed to be a reflection of supply and demand for talent, the value of certain skills, performance, etc. It is not supposed to happen simply because the numbers in a salary survey keep going up.

What we have here is a classic inflationary spiral. It is a bunch of companies looking at each other and reacting without bothering to consider WHY the numbers have gone up. Virtually every company (barring those on the brink of bankruptcy) will increase their base pay each year by an amount similar to every other company. This insane practice has been going on for decades and shows no sign of ending any time soon.

WHAT CAN YOU DO?

Instead of participating in this craziness, companies (especially those that wish to lead rather than follow) need to consider making some changes. Instead of relying on market data to determine how much to pay employees, they need to ask themselves ALL of the following:

1. Have the knowledge, skills and abilities REQUIRED TO DO THE JOB changed since the last time I increased the pay for this job?
2. Has the VALUE TO MY COMPANY of the knowledge, skills and abilities required to do the job changed since the last time I increased the pay for this job?
3. Have the knowledge, skills and abilities of THE PERSON IN THE JOB changed since the last time I increased their pay?
4. Have the SUPPLY AND DEMAND dynamics for the job changed since the last time I increased the pay for this job?
5. Have MY COMPETITORS changed they way they are paying since the last time I increased pay for this job?

Notice that the competitive market (item #5) is only one of five reasons to increase pay for a particular job. And it isn't even the most important one. If the answer to questions 1 through 4 are "NO" then you should not increase the pay for a particular job. Unfortunately, in most cases, a "YES" answer to number 5 is all most companies need to raise pay. This is a huge and costly mistake.

RELATED BOG ENTRIES

If you are interested in this topic, you also may want to take a look at the following other entries that are related to, elaborate on, or clarify the information and ideas contained in this entry:

Salary Data In The Public Domain -- Part I

Salary Data In the Public Domain -- Part II

Why Is My Salary Higher Than The Market?

Why is My Salary Lower Than the Market?

Common Misconceptions About Base Salaries

Why Are Base Salaries Such Notoriously Poor Motivators?

A New Slant On An Old Type Of Pay Discrimination

How Much Does It Cost To Hire a Good Professional These Days?

I recently attended a meeting where the combined billing rate of all the participants was $2,725 per hour (and, surprisingly, everyone had their clothes on!). In attendance were four attorneys, one accountant, and me, a compensation consultant.

This got me thinking -- what is the going rate for professional services these days? By way of full disclosure, this meeting occurred in the San Francisco/Bay Area; still arguably one of the world's most expensive locales. So I did a little poking around and here is what I found out:

TYPE	POSITION	HOURLY RATE
ATTORNEYS	Partner in Law Firm	$800 to $1,000
	Associate in Law Firm	$400 to $500
	Paralegal	$150 to $250
	Attorney – Solo Practitioner	$200 to $350
INFORMATION TECHNOLOGY	Project Manager	$100 to $150
	Web Designer	$90 to $120
	Computer Programmer	$80 to $120
	Database Administrator	$120 to $150
	Network Administrator	$125 to $150
MARKETING COMMUNICATIONS	Graphic Artist	$80 to $95
	Technical Writer	$65 to $95
	Editor	$15 to $20
BUSINESS CONSULTANT	Partner in Consulting Firm	$600 to $800
	Principal in Consulting Firm	$400 to $600
	Associate in Consulting Firm	$250 to $400
	Business Consultant – Solo Practitioner	$200 to $400
ACCOUNTANTS	Partner in CPA Firm	$200 to $350
	CPA – Solo Practitioner	$125 to $200
	Bookkeeper	$30 to $50

These are the rates you can expect to pay if you go direct. You might have to pay a bit more if you go through an intermediary such as a staffing firm.

Sadly, I have no current information on going rates for the world's oldest profession. But from what I can see, they should consider taking the Bar exam.

Salary Data in the Public Domain -- Part II

Not long ago, compensation professionals like me thumbed our noses at sites like salary.com, salaryexpert.com, payscale.com, and monster.com. We lived in fear that employees would discover these sites and use them to undermine the credibility of the company's formal pay program. Naturally, employees flocked to these sites and today large numbers rely on such data to validate the competitiveness of their pay.

Now that free salary data is an unavoidable reality, we must develop a strategy for dealing with it. The trick is not to shun these sites but to embrace the good ones, discourage the bad ones, and educate employees to tell the difference. Done properly, the salary information uncovered by employees on these sites will validate your company's compensation program, not undermine it.

The table below compares five popular salary sites on numerous important factors:

As the exhibit clearly illustrates, salary.com provides by far the best quality data available for free on the Internet. It turns out that the popular salary sites fall into three categories:

• Sites that publish data purchased from reputable compensation firms (i.e., Hay, Watson Wyatt, Towers Perrin, etc.). To my knowledge, salary.com is the only one that does this. (NOTE: Salary.com feeds their data to numerous other sites including  monster.com.)
• Sites that use data generated from government agencies (i.e., Bureau of Labor Statistics, US Department of Labor Employment and Training Administration, and State employment agencies). Salaryexpert.com is one of these.
• Sites that publish data collected on their site directly from the general public (payscale.com and glassdoor.com use this approach).

Up until recently, I have been recommending to my clients that they use only one of the following two sources of salary data:

1. Surveys purchased directly from reputable consulting firms i.e., Hay, Watson Wyatt, Towers Perrin, etc.). or,
2. Sponsor their own custom survey when they wish to secure data from a highly targeted group of companies in their industry.

In the future, I plan to urge clients to use salary.com instead of Option #1. It is cheaper, easier to use, and highly reliable. Sponsoring their own survey (Option #2) is still the most valid approach, but it is also the most expensive.

In the future, when employees approach you with issues or concerns about their pay stemming from information acquired on the web, if salary.com (or sites whose data is fed from salary.com) is their source, it is worth considering. At this time, I recommend they steer clear of all other sites.

Salary Data in the Public Domain -- Part I

Rich Barton, founder of the hugely popular discount travel site expedia.com and Chairman and CEO of the ingenious real estate site www.zillow.com, has a new venture. Known as www.glassdoor.com, it is designed as a forum for employees to critique their job, their company, and their company president publicly on the Internet. And for good measure, they are also encouraged to post their salaries and bonuses for others to see. All this data is assembled into a populist dossier that is heralded as "an inside look at companies from those who know them best."

Because of the cache of its founder, and what appears to be substantial financial backing, www.glassdoor.com has exploded onto the scene. But the concept is not new. Virtually everything contained in glassdoor is available elsewhere on the web (e.g., jobvent.com, pissedconsumer.com, salary.com, salaryexpert.com, payscale.com, monster.com).

Compared to the multitude of quality sites that post validated facts and vetted analysis from contributors willing to be named, (such as www.hoovers.com, www.morningstar.com, and www.dnb.com), glassdoor feels more like Jerry Springer than Tavis Smiley. But, sad to say, Jerry has his viewership, and so will this site.

For those who consider the primary purpose of the Internet as giving voice to the the voiceless, glassdoor will likely be heralded as meting out well-deserved come-uppance to the titans of industry. The site actively and unashamedly courts that familiar, disenfranchised Internet demographic that is eager to vent its spleen with impunity and anonymity. The creators of glassdoor, in their efforts to legitimize such activities, lure contributors with promises of "good karma" and assertions that they are "helping the community grow."

The Salary Sage wonders, in particular, how the salary and bonus data offered for free on the Internet by glassdoor and other sites impacts the lives of compensation professionals? And which sites can be relied upon by employees to provide dependable, useful information? More on this tomorrow.