The labor shortage has set off bidding wars for talent, which can wreak havoc on a business. If you want to avoid losing out, you have to be creative

The stock market plunged a couple of months ago, when the government reported a big increase in the cost of labor during the first quarter of the year. I wondered how anybody could have been surprised at the news. Out here on the front lines of the economy we've been struggling with rising labor costs for a long, long time.

In some industries the situation has become absurd. My friend Sam has a son named Philip, whose company makes software for Internet businesses. The good part is that the Internet companies pay Philip whatever he asks. The bad part is that he competes with them for people. He was looking for a top-level office manager recently, and one woman applied who was making $35,000 a year where she worked. Philip thought he'd hired her for $50,000 -- until her old company raised her salary to $75,000, and she decided not to leave. The same thing happens with the programmers Philip interviews. He offers them $60,000 a year, and they turn around and get $80,000 from their current employers. It's nuts.

Philip doesn't want to play that game, but he's up against companies that have millions in venture capital and care only about building market share as fast as possible. For those of us who have to worry about earning a profit, however, bidding for talent just doesn't work. There are real limits to what we can pay for particular positions, based on what it takes to operate profitably in our industry. If we pay too much, we could upset our entire compensation structure and wind up in deep trouble.

Then again, we have to deal with the realities of the labor market, and one reality is that you can't find certain types of job candidates anymore. For example, we used to hire a lot of people who had work experience and were available at a starting salary of $20,000 to $30,000 a year. They simply aren't around these days. We can still get people with no work experience who start out earning less than $20,000 a year (although their numbers are dwindling), and we can still hire people for $35,000 a year or more. But what I think of as typical midlevel, experienced job candidates are nowhere to be found.

I don't know how other companies deal with this situation, but we've had to make significant adjustments to our operations. In particular, we've created some new positions for people who serve as hands-on, roll-up-your-sleeves middle managers.

That's a big change for us. Like most businesses, we'd gotten rid of middle management in the 1980s, partly because we couldn't afford it anymore and partly because we didn't need it. In the old days, middle managers provided us with the information we relied on to run the business, but computers eliminated that function. Meanwhile, our margins were getting squeezed by competition. Something had to go. It turned out to be middle management.

Then came the labor shortage. We found ourselves hiring more people with less work experience and fewer job skills. To maintain our productivity, we had some of the more experienced and capable employees take on managerial duties. The role evolved, and we suddenly realized we had a new group of middle managers in the company.

There's an important difference this time around, however. The middle managers we used to have were strictly support people. They never dreamed of doing the jobs they were overseeing. In many cases they didn't know how.

Our new middle managers are proficient in the work they supervise. If we're shorthanded, they can step in and cover for other workers, and they often do. So they're better managers. They know what to expect. They don't make unreasonable demands of people, and they don't accept lame excuses. They can get more out of a department because they have the respect of the people they work with.

As a result we can afford to pay more for those positions, which allows us to go after job candidates who in the past might have been out of our price range. That doesn't mean, however, that it's easy to find them -- or to keep them once they're here.

Let me tell you about Michael, whom I met a few months ago, thanks to a canceled flight. He was driving the cab that my wife, Elaine, and I were taking from Kennedy Airport to Newark Airport in hopes of catching another plane to Colorado, where we were going on a week's vacation.

I could tell there was something different about him. To begin with, he kept calling me "sir." I asked him how he'd come to be driving a cab. He said he was getting out of the navy and had a family to support. He'd hoped to join the police department but couldn't take the test until he was discharged. I invited him to send me his résumé. He handed one to me on the spot. I looked it over and made an appointment for him to come see me as soon as I got back from vacation.

Michael was, in fact, an ideal candidate for one of the new middle-manager positions, but first he had to learn the ropes. We hired him at a reasonable salary and promised to review him in 90 days.

He was great. He did everything we asked and more. After a month, however, he went to his boss, Peter, and said he needed a raise. He hadn't realized how expensive civilian life could be. He loved the job, loved the company, but he had to earn 35% more a year.

So we had a quandary. I thought that, in the current environment, Michael might well be able to get the salary he wanted elsewhere. On the other hand, we couldn't give him a 35% raise after one month on the job without undermining our pay structure and creating problems all around.

How could we keep him? I sat down with Peter and the president of the company, Louis, and we put together a plan. Louis and Peter would meet with Michael and let him know, first, what a great future he had with us. I said, "You can tell him that, whatever he thinks he can earn in the next five years, he's going to earn more. But that won't satisfy him now, because he has a family to feed. We have to give him a way to get what he needs this year."

So we took the number and broke it down. We'd already promised to review him in 90 days. We could do it a little sooner and let him know how big a raise he could expect. In addition, we needed help on the weekends. Michael was the type who'd get a second job anyway. Why not give him a chance to work overtime for us? We could even make him the weekend supervisor. Between the raise and the overtime, he'd be getting most of the additional income he said he needed.

The goal was to give him a strong message. We wanted to tell him, in effect, "OK, we hear you. You need to understand that we have a structure we have to live with, but we really do want you here for the future, so we're going to do everything we can to work this out." I figured he'd stay if he really wanted to, and if he didn't, well, at least we wouldn't screw up the company trying to keep him.

As it turned out, Michael was ecstatic. My guess is that he'd been planning to drive a cab to earn the extra money. Peter is happy, too. He can relax on the weekends now, knowing that he has a supervisor of Michael's caliber on the job. Louis has to feel satisfied as well, because we've stayed within our guidelines.

So you can score that as one victory for sanity in an insane labor market. Still, we can't rest on our laurels. No doubt the next big challenge lies right around the corner.

Norm Brodsky has six businesses including a three-time Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at

Please e-mail your comments to