Internal compensation systems simply fail because they aren't designed to cope with external pressure. That's sort of a surprise, isn't it? Compensation systems are really all about managing conflict within an organization. With yearly (or even semi-annual) checks on the external environment, compensation systems are administrative tools designed to create a sense of fairness, not market sensitivity.

That's because most people, including the core of HR professionals and managers, believe that Human Beings are an infinite supply item. The notion that an organization would have to navigate a shortage is just not common thinking. It seems like there is always going to be someone to replace the last employee. This is why labor supplies are never checked when growth plans are made.

There is an enormous temptation to believe that there will always be enough people. It simply is not true.

Remember the movie "The Perfect Storm"? It's the story of a fishing boat caught at the intersection of multiple storm fronts. The emerging labor market is going to be something like that. Some boats will sink. Some very heroic recruiters will fail.

Here are the "storm fronts" in the Engineering Labor Market:

• Sustained Growth: Although it doesn't always feel like it, a 4.5% unemployment is all about constant growth. This round of good economic times is less buoyant than the last. The pressure on the supply of workers is actually stronger because the unemployment rate is lower.
   
• Creeping Inflation / Transportation Price Hikes: Whether or not the CPI reflects it (the CPI was altered in the early 90s to make it less useful as a measure of inflation.) $3.50 gasoline is making a difference. We see lines at gas stations when there's a $0.05 price difference. There is a definite economic pinch going on.
   
• Declines in Engineering Supplies: The dot com bust brought massive disillusionment to college age kids. Engineering enrollments have been down  for the past seven years. There are fewer engineers.
  

In conditions like this, new hires command salaries that exceed those of the existing workforce (Salary Inversion). Once the new hire salaries become common knowledge, the existing workforce becomes easy pickings for competing recruiters. The "raise pool" (compensation policy) always takes a year or two to catch up. This is what is happening at Microsoft today.

It's a great time to be a third party Recruiter. It's a not-so-good time to be an in-house Recruiter. These are the times that create the enduring animosity between the two camps.

What's next for online job posting?
What: Free Webcast (earn 1.5 SHRM credits)
Who: SmartPost and Bernard Hodes Group
When: Thursday, May 11 / 12:00 PM - 1:30 PM ET
Where: Register Online