Irrational Salary Escalation

By Frank Mulligan ñ Accetis International, Talent Software & Recruit China

If you have done economics in college you may have played the ëdollar auctioní. The game is used by economics professors to demonstrate how rational decision making processes can quickly, or easily, spiral out of control.

The rules of the game are simple. Someone puts forward a dollar bill for sale to the highest bidder. Usually the professor performs this role but anyone can do it.

Unfortunately, there is one proviso to the offer. The second-highest bidder has to pay up on their losing bid as well.

Participant number one, of course, bids one cent. This seems fairly simple because they will make 99 cents. Then the second participant bids 2 cents, and the third participant bids 3 cents, and on we go.

At every stage, so far, the participantís can hold on to the idea that they are ahead, and that they will make money. Everyone enjoys the process and few people can sense the illogicality of the final outcome. Those who do get out early and probably graduate with first class degrees.

The bidding continues but over time each of the participants is getting closer and closer to one dollar. Obviously when someone bids 99 cents then no one can make money with another bid. Surprisingly, the bidding continues but only between the to highest bidders. Each of these individuals can see clearly that they will lose out, whatever happens. But if they are the one to win the dollar they can reduce their losses.

They can only do that by continuing to bid and by outlasting the other bidder. Generally, we see that the two final bidders continue until the bidding is up to a few dollars. Someone usually just gives up and accepts the loss.

The theoretical underpinning of this behavior is called an irrational escalation of commitment.

China Salary Escalation
We might also call it the War for Talent in China. The result of this war is that the competitive position in China is gradually eroding, as illustrated by the Hay Group graphic below. Salaries in China are fast becoming the same as they are in other countries. At the moment this applies only for senior professionals but the effects of the War for Talent are filtering down slowly but surely.



The final goal in any business venture is a profitable business.

As the War for Talent in China continues we could soon find ourselves long past this possibility. A slowdown, considered in this scenario, would be a welcome breather. Then we could look to breaking the downward profitability spiral with workforce planning, training bonds, retention measures, career planning, succession planning and so on. We might also get some time to deal with the implications of the New Labor Law.

Watch 2008 closely.

Email frank.mulligan@recruit-china.com
Frank Mulliganís blog - english.talent-software.com

Frank Mulligan will be speaking at this years Online Recruitment in China Conference - To book your ticket please email wendy@onrec.com or visit www.onrec.com/china for more information.