Inventory Overload

Government figures tell us the US market—the world's biggest—has never been stronger. And yet there is unrest—politically, economically, and socially. In this occasional series, Korn Ferry examines a string of contradictions that are leaving so many corporate leaders baffled.

It’s a classic half-full, half-empty scenario. On one side is statistical full employment, with the US unemployment rate falling to 4.3 percent, the lowest level in 16 years. But the other side is much dimmer: Wage growth remains stubbornly low. As the US Bureau of Labor Statistics reports, hourly earnings for the average worker have risen by only 2.5 percent over the last year.

On the face of it, it doesn’t make sense: strong demand for labor, yet stagnant wage growth. The deeper reasons reveal a labor market that, in most sectors, is not as tight as unemployment numbers make it seem. Many employers can easily hire the talent they need without having to bid up on wages.

“For the past several years the world has been working through excess inventory of everything,” says Scott Kingdom, Korn Ferry Vice Chairman, Board and CEO Services. “There was simply too much capacity, with flat to declining demand.”

As inventories of everything from houses to consumer goods were slowly reduced, it has had a naturally deflating effect on the price of virtually everything—including labor.

The impact is felt in levels far from the factory floor. People with titles from senior manager to director and senior director are often being hired in what can be seen as a “buyer’s market” in many industries. “If employers were struggling to attract people at the set pay range they’re offering, they would re-evaluate,” says Liz Schaefer, Managing Consultant, Industrial Markets, for Korn Ferry Futurestep. “But in all honesty, I haven’t seen them having to raise wages above where they want to pay.”

Even at the senior-executive level, wage growth has been less robust than in years past. The most recent CEO compensation report shows the median annual cash compensation for CEOs is flat at $3.5 million, including minimal base salary growth of 0.8 percent to $1.3 million. The notable growth for CEO rewards has been in long-term incentives paid out based on performance.

There are exceptions to the low-wage norm: Top performers, especially those in high-growth niches such as in technology or alternative energy, always make more money. They may, in fact, see a bidding contest for their services.

Elsewhere, though, in this era of ever-growing efficiencies and companies trying to boost profits by reducing expenses, wage growth is likely to be muted.

Interestingly, that may not be a huge issue with all workers. Some baby boomers, for example, scarred by the 2008 recession and nearing retirement, may be just happy to have work regardless of pay. What's more, some people who aren’t negotiating as hard for money are seeking instead different incentives such as flextime, telecommuting, and additional vacation and paid time off. Employers who don’t want to increase the direct cost of hiring talent may be more inclined to be generous when it comes to nonmonetary rewards.

“For example, people who work in big cities might be tempted to take a lateral in compensation at another job if it cuts their commute,” Schaefer added. “There are other motivators out there besides wages.”