The recruiter who approached Matan (not his real name) with a tempting offer to jump ship, turned out to have a good nose. After several years as a senior programmer at a global software firm, he had exhausted his opportunities.
Following negotiations with the new firm, he was offered an attractive position and a compensation package 50 percent higher than at his current job. Before signing at the new firm, he informed his old managers that he was leaving – but they asked him to hold on, to see what they could do. “I was really trying to leave. I wasn’t trying to pressure them into giving me a raise,” he explains. “Nor did I think that they could match the offer I got.”
His managers knew that they were in a race against the clock, and despite being a massive corporation – they got back to him within two days with a game-changing offer: They matched the compensation package, and offered him a new position. “I was pleased with them matching the salary, and the change in position also answered my need for something fresh. So I’m pleased for now. I got what I wanted without leaving,” he says.
“It makes sense to invest in retention of existing employees,” he says. “If an employee leaves, the company will have to bring someone new in at a similar salary. Companies lose a lot of money when they lose an employee and need to find a replacement.”
Matan’s story is to a large extent the story of the labor market in the Israeli hi-tech industry over the past year. The growing demand for workers, alongside a critical shortage in technological workers, has pushed the competition for talent to the edge. Companies have had to face complex challenges in recruiting and retaining workers, and were forced to react quickly and flexibly. Among other solutions, they utilized creative and expanded salaries and compensation tools, beyond pre-planned budgets.
A recent market study found that hi-tech companies in Israel raised their employees’ wages by an exceptional average rate of 6.5 percent. This is in comparison to 2.3 percent in 2020, when only 70 percent of companies raised wages, due to the uncertainty created by the COVID crisis. In the five years prior to the COVID crisis, 2015-2019, companies raised their employees’ wages by an average of 3.5 percent. Overall, some 90 percent of hi-tech companies raised worker compensation last year. The study by Zviran – which specializes in salary reviews, consulting and pensions – is based on 2021 data as received from 340 hi-tech companies, employing some 135,000 workers in Israel.
The data shows that companies had planned to raise wages by an average of 4.4 percent in 2021, but the intense competition for workers made them reach deeper in their coffers. Some 40 percent of hi-tech companies exceeded their payroll budgets in 2021 – an unprecedented figure, far above previous years. Among companies exceeding their planned payroll budgets, the average budget excess was almost 90 percent – meaning that they almost doubled their planned payroll outlays. Smaller companies were more likely to exceed their budgets, whereas larger firms experienced smaller budget excesses.
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Israel, it seems, is now facing its own wave of resignations, much like the so-called “big quit” or “great resignation” that took place in the U.S. last year.
The sharp pay increases offered by the companies are meant to stop the massive hemorrhaging of workers. According to Zviran data, the rate of resignations in hi-tech last year was 13 percent, as opposed to only 6.8 percent in 2020 – the year the crisis began, and made workers stick to their ergonomic chairs till the storm passed. Even if we ignore the anomaly of 2020, the rate of resignations in 2021 remains high even in comparison to pre-crisis years.
Ronnie Perchick, Data and Polls Manager at Zviran, says that the past year was abnormal in all aspects. She says that after emerging from the shock of the COVID crisis back at the end of 2020, in 2021 workers regained their confidence and realized that they could improve their conditions by skipping from one company to the next. This is not a new phenomenon, and is a well-known way to get a raise outside of hi-tech as well. But Perchick says that it has all been taken to extremes in the past year – as can be seen in the rate of resignations and the response by firms exceeding their budgets to retain workers.
The results of the increased investment in existing workers can be seen in the wage gaps between them and workers recruited in 2021. While the new workers still make more on average than the existing ones, in accordance with the trend of recent years – but the gaps have not grown, as they did in 2019 and 2020 – but closed a bit. Perchick explains that the situation in which new workers enjoy higher wages than existing workers put the companies in a quandary, making them realize that it was time to invest in the existing workers. However, the companies didn’t give blanket raises, but focused on specific teams and individuals they can’t afford to lose.
Therefore, she explains, the ability of companies to map talents and identify key workers is critical. “There’s no use in investing budgets in all workers across the board. Companies have to optimize budgets, and have to spend the big money on workers who possess critical knowledge, workers whose departure would cause the company significant difficulties,” Perchick explains.
“Companies need to have their finger on the pulse regarding the compensation level of such workers compared to the market, and focus on retaining them. Equally important is to give them meaningful work.”
Thus, in an attempt to prevent the wave of departures, companies’ focus has switched over the past year to their existing workforce. The companies have come to their senses and realized the unsustainability of the situation where new workers enjoy much higher salaries than their veteran counterparts, who already constitute an important part of the company. After all, the very situation of wage gaps in favor of new employees is an anomaly stemming from the immense competition for tech workers. With the premium on new workers so high, this only encourages frenetic movement of employees between companies, with companies incurring significant expenses due to worker turnover.
When asked whether the resignation rate in 2021, which stands at 13 percent, represents a success of retention efforts or a failure thereof – Perchick says that she doesn’t think it’s a failure. “If companies had not undertaken these retention efforts, we would have seen an even higher resignation rate,” she believes.
In 2021 the hi-tech sector reached a peak – with almost 100 IPOs of tech firms in Tel Aviv’s stock exchange, and fundraising that nearly doubled the 2020 figure, totaling 25,4 billion dollars (as of December 2021, according to Startup Nation Central figures.) Competition for workers – new and existing alike – heated up accordingly, with designated recruiting campaigns and far-reaching benefits. But it seems that 2022 is starting a bit differently – many hi-tech firms took a dive in the stock market, some shedding dozens of percentage points of their value. Now it just remains to be seen whether the massive worker retention trend of 2021 can continue into the new year.
The question is whether this situation can last for long. “That’s the million dollar question,” Perchick says. “This can’t last for years. You can see that the payroll update projection for this year is more moderate. 2022 may be calmer, but on the other hand, the intense competition may change projections again.”
Abnormal pay norms
Matan’s story, with which we opened, and Zviran’s numbers, are something Reut Rubinstein knows well from the employer’s side. She works as VP HR at Israeli software firm Lusha, which has developed a business data platform for sales and marketing. Lusha is a strong firm - it raised 200 million dollars in November 2021, at a valuation of 1.5 billion dollars, after the money.
Rubinstein describes heavy competition for workers among Israeli unicorns, global firms, and even smaller local startups. “We have to retain people over time, so that they don’t succumb to outside offers. I know they get lots of offers all the time. That’s our reality,” she admits. The fiercest competition is for ‘DevOps’ workers, full stack developers, and full stack team leaders.
Lusha is growing rapidly in the payroll column. It began 2021 with 110 workers – and currently employs 265 people. The company is aiming for 400 employees by year’s end. In total, some 20 people left the company last year, split evenly between those who left voluntarily and those who were terminated. “There are all kinds of reasons to leave a company – and we want to make sure that the financial remuneration won’t be one of them. I can tell you wholeheartedly that we didn’t have a single departure in 2021 over pay,” says Rubinstein.
The reason, she says, is simple: “We proactively check our employees’ salaries every quarter, to make sure that they are compensated in line with market norms.”
But market norms change rapidly, and are far from normal by now. Rubinstein says that pay in the industry has skyrocketed in the past year, which is why new employees are paid more than existing ones: “I don’t want to harm the existing workers’ sense of fairness. It’s great to recruit new workers, but I don’t want our workers, who are already contributing to the company and are a part of our success – to be left behind.
“That’s why I check the pay of all my workers once a quarter, without them having to ask and hold embarrassing salary talks, to make sure they are up to par. I want to make sure that there is fairness in pay between workers, including the new ones. I make sure to close the wage gap for the veteran employees. I do it to prevent ill feelings, and situations where employees who have been with the company for a year and a half come to me and ask why a new employee with the same level of experience is making a lot more.”
How much more money can the company pour down on payroll? “It’s a matter of budget management, and there are dilemmas, but in the long term, I wouldn’t save by compromising my veteran workers’ pay. What I can do is say no to candidates with exorbitant salary expectations. We try to maintain boundaries, responsibility, and balance.”