North Ridge Partners

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Salary Inflation in the Tech Sector - How Real is the Problem?

We’ve all read the headlines: there’s a global war for tech talent, there aren’t enough skilled workers to go around, and costs are escalating.

We went into this discussion knowing there’s a problem, having experienced it across the suite of companies we advise and invest in, but with a level of scepticism. So – just how real is this problem, and could it possibly be a media beat-up?

The backdrop certainly supports the thesis that there’s a major crunch underway. Technology employment markets were already strong in late 2019, with the arrival of COVID-19 creating a perfect storm. Borders closed, stymieing skilled migration, as employees switched to working from home — loosening the cultural ties that bind them to their companies — and, most importantly, digitalisation massively accelerated.

That, in turn, drove unprecedented demand for specific tech skill sets that remains unfulfilled today and is creating headaches in HR departments the world over.

Business statistics site Statista identified technology capabilities as the most in-demand skills around the world, but it goes deeper than that. With Ecommerce skills being given their own skill category (they came in third on their own!), we really start to see just how critical the talent problem has become, especially in markets such as Southeast Asia where many of the region’s unicorns come from B2C and eCommerce sectors.

With the labour market said to be sizzling, the best evidence is your own experience. We polled the readers of the Tech Round-Up in early December. This audience – comprising thousands of the region's leading tech founders, CEOs, board members and VCs – are united in the view that this is no illusion, with one resounding message: everyone is chasing tech talent.

And it's a hard row to hoe. When we asked employers to rate on a ten-point scale how difficult they are finding it to retain and attract talent – 88 per cent indicated a rating of 7/10 or higher, with 8/10 the most common result. 

The responses around wage inflation were likewise overwhelming, with 55 per cent saying they are paying up to 25 per cent more in higher wages and almost four in every ten business leaders indicating even stronger wage inflation of between 25-50 per cent higher wages. 

The problem exists across the region with little differentiation between Asia and ANZ. One of the more significant longer-term impacts is the democratising of salaries between traditionally higher and lower-wage markets.

We see large tech companies in the region reporting US competitors willing to hire Aussies and Kiwis on US dollars with the ability to work from home in ANZ on US$ salary rates. Indeed, there’s evidence that tech talent is becoming dollarized, with organisations paying US dollar-based packages regardless of where the talent is located.

We saw examples of a US platform company raiding a prominent Australian tech company, hiring half of its software engineers on US dollar packages, while another high growth ANZ company has decided to dollarize all its employees to avoid them being picked off.

Retention

Industry leaders are evenly split about the best way to retain talent – 51 per cent indicated money and benefits matter the most whilst 49 per cent indicated corporate culture and work/life balance. 

So where does work-from-home fit into all this? According to our readers, 46 per cent said they are considering changes to the office environment, and making WFH a permanent feature.

Back to the Future – Offshoring

More than a quarter of our respondents recognise that closed borders (or at least the increased difficulty in moving between countries) mean a reduced (and more expensive) talent pool, and are considering nearshoring or offshoring.

Companies headquartered in countries with closed borders are turning to offshore markets in Asia and Eastern Europe to lower their cost bases and secure talent. While only 18 months ago these markets were severely affected by COVID and service was at times suspended, pressure to deliver business plans and product roadmaps is forcing companies to reconsider their approaches.

The Great Squeeze

Across the board, companies studying salaries in the tech sector are arriving at the same conclusion. A KPMG survey on salaries points to 30 per cent wage growth, but cost isn’t the only business impact — positions also take time to fill, which delays development roadmaps. 

Every company Chair we speak to says the same thing — “with borders closed or now harder to traverse, we are all stealing each other’s people and the costs are escalating. If we don’t rethink our business model, this will end in tears with deadlines missed and earnings impacted.”

The situation is likely to get worse — not just in APAC but also across the globe. According to management consultant BCG, nearly three quarters of employees surveyed internationally expect to switch positions in the next two to three years, “… and 40 per cent are actively job hunting”. 

BCG notes that the problem for non-technology businesses may be even more acute. “This poses a particularly perplexing problem for employers outside the technology industry that need this highly desirable talent pool to transform their businesses but might not be digital workers’ first choice when they look for work.”

According to technology research company Gartner, compensation remains the single most important factor employees consider when deciding whether to switch jobs. It says, “this hasn’t changed for 20 years and isn’t likely to, so it’s important to know the premium employees expect to jump ship.” However, what has changed is motivation. According to the results of its Global Employee Survey of more than four thousand employees, 65 per cent of respondents said the pandemic has made them rethink the place that work should have in their lives.

All of which has given rise to discussions about “The Great Resignation” — a phrase first mooted by Anthony Klotz, an associate professor of management at Texas A&M University in an article with Bloomberg in May called “How to Quit Your Job in the Great Post-Pandemic Resignation Boom”. 

Employees retreated to economic safety by staying in their current roles during the early days of the pandemic, but two years’ worth of pent-up demand for new opportunities is being unleashed on the world, and it’s happening at the very moment accelerating digitalisation has massively increased the demand for technology talent.

New models

Adaptation is the key to survival, with new models for recruitment already emerging. Take for instance the approach of Collective, a French start-up that recently raised €7 million in seed funding and wants to provide a platform for groups of freelancers to come together on a case-by-case basis to compete for, and implement, projects traditionally delivered by companies.

According to a study done by the start-up more than 50 per cent of the working-age US population will earn income from independent work by 2027. The figures come from the Upwork and Freelancers Union that predicts freelancers will represent the majority of the US workforce by that time. 

Collective’s own study in Europe reveals that 90 per cent of freelancers, experts and creators expect to team up in the future. This potentially ushers in an era of virtual companies made up of people with complementary skills operating under a temporary brand that form and reform to meet particular needs.

Ray Wang, the founder of Constellation Research in the US also believed we will see the emergence of new models. In what sounds almost like the inverse of the Collective model, Wang says we are likely to see the emergence of a trend where companies loan or swap highly skilled staff between non-competitive businesses as a way of maximising the monetisation capacity of highly trained employees, but in a way which maintains a connection to the ultimate employer.

Earlier this year Wang told Digital Nation Australia that companies may “…do rotations of super-skilled talent, just to be able to keep them in the pool.”

Incumbents are also changing how they think about the physical relationship between the employee and the business in a hybrid world. 

The shift to hybrid work for instance is encouraging companies to consider new technology hubs designed around the concept of collaboration, and lifestyle.

Just such an offshore tech hub is being built just off Singapore at the Indonesian island of Batam. In that case, billions of dollars are being spent to service Singapore which is less than 60 minutes away by fast-ferry.

Meanwhile, other companies are considering setting up development centres in lifestyle locations like Queenstown in New Zealand where they can offer key employees the opportunity to work for a period — or even permanently — to secure their loyalty by providing lifestyle benefits so attractive they will help companies to retain staff. 

Workers of the world unite! You have nothing to lose but your gym membership and access to the ski fields!