IT Compensation by maclaren1

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									        A Report to the
 Utah Information Technology
         Commission


The Information Technology (IT)
         Labor Shortage
    The Eroding IT Talent Pool and Its
    Impact on Utah State Government




         Chief Information Officer‟s Section
              Utah Governor‟s Office
                  October 19, 2000
                                Executive Summary
                 The Information Technology (IT) Labor Shortage
         Eroding the IT Talent Pool and its Impact on Utah State Government

Call it what you will. Nationally the problem has been labeled “The IT Talent War,” the
“Hiring Crisis,” and “Generation X-pensive.” What it means to Utah is that there is a
significant shortage of people with the needed high tech-skills to develop, maintain, and
manage the modern information technology infrastructure upon which our state‟s citizens
and businesses depend.

In April the Council of State Governments reported, “How to find and keep IT workers is
about the biggest issue we‟re facing.” Forty-four states called the shortage “regular” or
“chronic”. The Council‟s poll found three main obstacles to overcoming the shortage of
government IT workers: “low pay, lack of qualified workers and the perception that
government technology lags far behind that of the private sector and lacks much appeal.”
Utah government has not been immune to this problem. The State‟s Strategic Information
Technology Plan identified as one of its three key strategic goals to “Continuously hire
and effectively manage the best possible IT employees”.

Problem
It is extremely difficult to compete for IT professionals in the current tight labor market.
As a result the state has experienced a loss of critical IT talent while also being blocked
in its efforts to recruit newly skilled IT workers as replacements.

      Over the last year 11.8% of IT employees have terminated and another 9% have
       transferred which results in a total of 20.8% of IT positions being vacated.

      State IT salaries now average 15-20% below market and recruiting efforts are
       failing because state salary packages and benefit packages cannot effectively
       compete in the current market.

      Private industry routinely offers signing bonuses, stock options and matching
       401K plans as added inducements to IT professionals. These perks have wiped
       out nearly any advantage that the State historically has had with its benefits
       package.

      The State is now dependent on the successful development and maintenance of
       their information technology systems to help provide its most basic services to
       citizens and businesses both effectively and efficiently. Failure or reduced
       functionality of information systems creates grave financial consequences to our
       state‟s businesses.



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Proposal
To begin to address this issue, the following proposal focuses on IT funding, training and
continuous recruiting to attract and retain IT professionals.

      The proposal requests discretionary funds based on the amount calculated using a
       one-step increase for IT employees. The total amount is $1,230,243.00 plus
       approximately 27% in benefits. This amount would be used for bonuses, step
       increases, and incentive awards. The criteria for distribution would be based on
       attracting and retaining key personnel who possess highly demanded IT skills.

      Increase the percentage of agency IT budgets devoted to training and continue to
       expand and support the recently created Training Resource Center to improve the
       availability and accessibility of statewide IT training while reducing per seat
       training costs.

      The Chief Information Officer will develop and help execute an implementation
       plan, in cooperation with the Information Technology Sub-Cabinet Group, to
       continuously recruit and effectively manage and retain the best possible IT
       employees.




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                 The Information Technology (IT) Labor Shortage
         The Eroding IT Talent Pool and its Impact on Utah State Government
                A Report by the Chief Information Officer’s Section
                              Utah Governor’s Office


Government has learned, like private sector businesses, that added value and increased
productivity will be achieved when organizations redesign their practices to take
advantage of advanced information technology, according to a 1999 report by the Office
of Technology Policy, U.S. Dept. of Commerce, The Digital Workforce. The report
concluded, “For years, economists have expressed skepticism about IT‟s contribution to
economic growth and productivity improvements. In recent years, many economists
have come around. Today, one of the Nation‟s leading economists, Federal Reserve
chairman Alan Greenspan, is an enthusiastic supporter of the vital role of IT in the U.S.
economy. Last year chairman Greenspan told a business audience, „The United States is
currently confronting what can best be described as another industrial revolution. The
rapid acceleration of computer and telecommunications technologies is a major reason
for the appreciable increase in our productivity in this expansion, and is likely to continue
to be a significant force in expanding standards of living into the twenty-first century.‟”

The High Demand for IT Professionals Will Continue Through 2005
In changing how we use technology we have increased the demand for technology
workers while not paying close enough attention to its supply. The Information
Technology Association of America (ITAA) commissioned one of the largest and most
comprehensive studies of the IT workforce ever conducted. The report Bridging the
Gap: Information Technology Skills for a New Millennium, explains how “…information
technology has dramatically changed the composition of the U.S. workforce by
producing an incredible demand for IT workers… With demand for appropriately skilled
people far exceeding supply, half of the projected demand for 1.6 million workers will
likely go unfilled in the year 2000.” An ITAA task force reports, “The ITAA study and
a number of localized studies are predicting an escalation of the problem over the next
eight to ten years.” Utah Information Technologies Association‟s (UITA) survey of
September 2000, confirmed this shortage and reported that an average of 42% of
technical positions are not filled due to skilled workforce shortages. The Office of
Technology Policy projects that over two million new IT workers will be needed by
2005. On the supply side the number of computer science degrees decreased more than
40% from 1986 to 1994 (U.S. Dept. of Education).

The Growth and Dominance of the Internet: a Leading Cause of Increased Demand
In spite of the increased salaries paid to programmers and web developers, smart
companies and smart governments can still gain competitive advantage, by increasing
customer service and loyalty by offering convenient 24X7 services. Increasingly smart
governments now offer services that permit more and more citizens to “get online instead
of in line” to conduct their business. Joyce Plotkin, Executive Director of the




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Massachusetts Software Council concludes: “The Internet is the most important factor in
the increased need for software professionals so far.”

IT Plays a Critical Role in Meeting Agency Missions
In the past government has relied on technology to help automate some “back office
processes” and as well as keep statistics on clientele to assist administrators in
determining the effectiveness of client/customer service. The role that technology played
was contributory to agency missions, but if “worst came to worst” organizations could
usually revert to manual labor to get the job done.

Today state government services are either predominantly or in some cases almost totally
dependent on technology, just as are our banks, manufacturing facilities, retail sales,
parcel delivery, and many other business services that we take now take for granted. IT
is as firmly embedded in today‟s state agencies‟ basic operating missions as the
microprocessor is in the modern automobile. The change in every aspect of our lives is
simply phenomenal whether we are thinking how we now visit an ATM instead of a
teller, or order our Olympic venue tickets online.

This progress, although it has created enormous convenience and opportunity, now
requires that government at all levels and across all branches take the IT talent shortage
seriously and meet the challenge head on. Suggestions that “we are all in the same boat”
since private companies also find it difficult to hire qualified IT talent should be carefully
scrutinized. We may be in the same ocean, but our salary disparity in relation to the
market places us by analogy on rough seas in a “life raft.” Clearly, the IT labor shortage
presents enormous challenges for IT companies too. The problem faced by the state‟s IT
managers however, is even more acute and action is needed to quickly reduce disparity.

Will ‘Unplanned Obsolescence’ and Crisis Management Become the Legacy of Even
Good IT Managers in the Public Sector?
When state government is unable to compete with the private sector for labor talent, its
own labor pool, without significant investments of training dollars, will soon possess
obsolete skills. This leads to the maintenance of increasingly costly and troublesome
legacy systems. According to Diane Tunick of the Gartner Group, “ Companies who
have not looked at IT as a competitive edge or who have not addressed creating an
effective structure in IT are still inefficient.” Government needs to become more
efficient, not less, and recruiting and maintaining good IT talent will provide the human
capital to do it.

A significant shortage of qualified IT personnel in a department can create a crisis
environment within its IT shop. This directly impacts both the level of services provided
to the public and as well as IT staff support for other agency workers who depend upon
IT tools to get their jobs done. Staff cannot be responsive to user needs; system
improvements have to be set aside for general maintenance. In the end, this type of crisis
management contributes to an unattractive working environment for IT and non-IT
workers alike. This in turn may convince otherwise satisfied workers to look for greener
pastures. And the IT private sector pastures are green, ready and waiting.



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E-Government, an At-Risk Program?
For the state‟s e-government initiatives to be effective and to move forward with
increasing speed, the state must find creative ways to retain and attract Internet savvy IT
professionals. This is an enormous challenge and barrier to the success of E-Government
efforts. Even the state of Washington, the Nation‟s most digital state according to the
annual Center For Digital Government‟s national surveys, has about 240 government
services online out of many thousands of potential services to citizens and businesses.
The ability of states to maintain their own talent pool will either assist, slow or stall a
state‟s e-government efforts.

It Really Costs More to Replace Them Than to Give Them A Raise
Anytime an agency loses key personnel it is very costly. Based on recent Meta Group
Research, September 2000, the “costs of personnel replenishment averages around 200%
of exiting employee salaries. This is an increase over their 1997 research which indicated
the costs at 60% to 135% of annual compensation, with the most critical positions
nearing 135%.

IT Staff Are Being Lost At Higher Rates Than Non-IT Staff in Utah State Government
Over the last year 11.8% of IT staff have terminated and another 9% have transferred,
resulting in a total of 20.8% of the positions being vacated. For non-IT personnel
terminations were 11.5 % and transfers 5.1% for a total of 16.6%. Looking forward,
within 5 years, 21% of IT personnel will be eligible for retirement; 17% of non- IT
personnel will be eligible. (These figures are based on reports generated by the DHRM
for the last 12 months.) The exit of IT personnel is expected to continue.

Agencies that have been aggressive in providing training opportunities for staff to update
their technical skills have then been faced with the challenge of retaining these people so
the agency can reap the benefit of the new skills. As skills are updated in areas such as
modern web development languages, it does not take long before job opportunities at
higher salaries and better benefits are offered. The Office of Technology Policy
addressed this issue, “Why, then, do some companies offer training and education to their
IT employees? In some companies, training and education are offered as benefits to
employees (to attract or retain them) who understand they must keep their skills current if
they are to remain viable in the IT labor market.” The kinds of problems faced by
agencies are reflected in actual situations summarized below.

      A new hire that had just graduated was brought in as a Programmer Analyst II and
       5 steps above the first step for this position. In spite of this, he had to be trained
       in the specific programming language needed. Two years after starting, he was
       offered about 50% more than he was making.

      In the last year an agency lost 4 LAN administrators, which is 16% of its LAN
       staff, and 7 programmers, which is 19% of its programming staff.

      Another agency lost 3 programmers who left for salary increases of 30-40%.



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      Even an employee newly trained in Java and still at a low to medium level of
       effectiveness as a programmer, was hired away at a 25% salary increase.

      In the last 6 months one agency has experienced a 50% turnover in IT staff in
       spite of increasing compensation within allowable limits in an attempt to retain
       experienced staff. The result has been significant disruption to the department
       and a reduction in ability to meet the expectations of its customers.

Based on anecdotal information from agencies, new job opportunities and the higher
salaries they offer, appear to be a significant factor in staff vacating positions.

Will the Salary Disparity Between Public Sector IT Jobs and the Market Become So
Great That the Window of Opportunity to Address the Problem is Lost?
Computerworld‟s “Annual Salary Survey,” September 4, 2000, reported that
“Compensation for IT professionals is rising by double digits again…” In this kind of
labor market it has been very difficult for the State to attract people to fill its high-tech
vacancies. The State‟s entry-level salaries are significantly lower than national averages
as shown below:


                                         Entry-level Salary Comparison

                                       State           Natl. Survey*

IT AP I (Systems Programmer)     $32,864         $41,332
IT AP III (Sr.Sys. Programmer)   $45,510         $48,445
LAN II (Network Administrator)   $36,628         $41,332
___________________________
*ComputerWorld’s Annual Salary Survey, Sept. 4, 2000

In the September 2000 survey by UITA, Utah technology members were asked, “What is
your average starting salary for engineers/computer scientists at the bachelors level?”
The overall average response was $52,000 with an average range from $45,000-$60,000
per year. A computer science student with a bachelor‟s degree without experience would
generally qualify as an IT AP I with a salary range beginning at $32,863 under the state
classification system. The UITA survey indicating that private sector IT salaries in Utah
are higher than the national average is consistent with reports extracted from Salary.com
which reports the low average actual compensation range as $40,000 to $60,000 per year
in Salt Lake City. Salary.com is an online source for compensation information compiled
from proprietary research and published reports. These salary comparisons underscore
the difficulty state agencies face in competing to retain and recruit people with IT skills.

The urgency of the situation cannot be underestimated. As public IT professionals
continue to exit, finding replacements become even more difficult as IT salaries in the
public sector become even more disparate with the market and the effects become
cumulative. If increases are not sufficiently funded the window of opportunity to solve


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the problem at all may be lost completely. According to the State Department of Human
Resource Management, state IT employee salary ranges are 13-14% on average below
market. If salaries are compared, the picture is far worse. State IT professionals earn on
average 15-20% below the market and in some high demand areas such as LAN
Administrators, salaries are now 25% below market.


                       Percent Salary Increase Per Year

             9
             8
             7
             6
   Percent




             5
             4
             3
             2
             1
             0
                 Utah State Jobs       All Jobs           IT Jobs

Source: Department of Human Resource Management

The chart illustrates how the problem is cumulative. In general Utah government salaries
have not kept up with the average annual increase in all jobs -- a 2-3 percent increase as
compared to 4-5 percent. This difference is even more significant when comparing that
2-3 percent increase for state IT jobs to other IT-specific jobs that increased an average of
7-8 percent. According to the U.S. Dept. of Commerce “Private sector salary surveys
generally suggest faster salary increases for core IT workers of 7-9 percent in recent
years, and even more rapid increases for those working in key specialties and/or those
with the hot skills or combinations of hot skills.”

Information Week 1999 National IT salary Survey reported a median annual salary
increase of 8.9 percent for all IT workers. Computerworld—1999 Midyear Salary
Survey, cited “1999 looks to be more of the same: rising salaries, personnel shortages that
spell tremendous opportunity and signing bonuses for those who are most in demand.
Salaries have risen so sharply in the past year and a half that information technology
managers are struggling to keep up with market rates—or to even know what they are.”

A comparison of local data, collected by the Department of Human Resource
Management, shows that over the last 5 years county salary increases have exceeded the
state by 3.8% to 15.5%. (The counties included are Davis, Salt Lake, Utah, Washington,
and Weber.)

In trying to recruit skilled IT professionals, the State is also competing against innovative
benefit packages. A Drexel University and Rider University study found that even
though IT workers rate career development and non-monetary compensation as important


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to their job satisfaction, monetary compensation ranks high among the tools used by
companies to recruit and retain employees. Among the more common tools employed:
signing/performance bonuses, salary premiums for hot skills, stock options, referral fees,
royalty fees, child care, flexible hours, telecommuting, training and education, tuition
reimbursement, time off/extra vacation time, gyms and exercise facilities.

The experiences of state agencies provide actual examples of the impact of this problem.

      One agency programmer left for a position with a 40% salary increase, signing
       bonus, 66% match on 401K and sick/vacation leave from the first day.

      In an attempt to hire experienced staff, one department made 6 offers within the
       last 9 months that were not accepted. Either the current employer exceeded the
       offer or they found other opportunities for significantly higher salaries. This
       agency also tried hiring new college graduates. They lasted less than six months;
       they found new opportunities with higher salaries. “We lack the ability to give
       them increases as they increase their skills,” the agency reported. In its most
       recent recruitment 10 resumes were received in direct response to their
       advertisement; however, these people had no qualifications whatsoever.

      Even when an agency invests money and staff to participate in job fairs the results
       are poor. After talking to about 100 people, only two applications were received.
       One offer was made and it was declined because the salary was too low.

      An attempt to hire an experienced PowerBuilder programmer, an agency fell short
       $10,000 to even meet the applicant‟s current salary. Recently this agency made
       an offer but the person‟s current employer came back with a higher counter-offer
       which this individual took; he said that the state‟s offer would have to be
       substantially higher, $60K plus.

      In the last 2 years one department lost 4 programmers and still has 3 unfilled
       positions. In the current recruitment process 3 applicants have been offered
       positions and all of them turned down the offers because salaries were too low.
       All of the individuals wanted between $4 and $8 more per hour to even consider
       the jobs.


Outsourcing an Expensive Alternative and Only a Partial Solution
One option that has been pursued to offset the difficulty in filling IT positions has been to
outsource or contract for services. Based on data from the Utah Division of Finance




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shown in the table below, the state has seen nearly a 400% increase in dollars paid to IT
contractors over the last 3 years.

          Annual IT Contractor Costs

       1998           1999            2000
                    (millions)
       $1.25          $2.99           $6.01

In the agencies this means higher costs for maintaining and improving systems. It also
contributes to personnel problems with people doing similar work at significantly
different compensation rates. Contracting for services also does not solve the personnel
problem, as it requires agencies to have highly skilled staff to manage both the contract
and the work done to insure a quality product is produced.

The following examples reflect the high cost of contracting for services.

      One agency has had to contract for 12 programmers averaging $67 per hour or
       $140,000 per year. The state salary range has a maximum of $72,155 per year for
       the highest-level programmer, or just over half the salary of a contract employee.
       For programmers with higher demand skills contract employees average $175,000
       per year -- more than double the state maximum.

      In comparing its options, one agency estimated that contracting for services would
       cost over two and a half times as much as hiring the same number of staff to do
       the work in-house given the current salary structure.

In describing the costs of outsourcing the report does not imply that outsourcing should
not be used in state government. Some very specialized skills will only be obtained
through vendor contracts. Agencies must selectively decide whether to build, to buy or
have someone else build. Outsourcing should continue to be encouraged in areas where it
is appropriate but it can never substitute for in-house expertise that still must be able to
analyze data models; clearly understand the needs of the systems customers, ensure
compliance with project specifications; and track projects so that they will come in on
time and within budget. Total outsourced approaches often result in skyrocketing costs
and loss of control. These experiments most often fail because governance cannot be
outsourced and the knowledge to provide oversight is far removed from the systems
development effort. Public/private partnerships continue to be a growing model of
choice in many states.

 Tight IT Labor Market Complicated Further by the Rapid Extinction of IT Skills
As often cited in the press, there is a tight labor market overall. The U.S. Dept. of Labor
reported that the national unemployment rate of 3.9% for September is a 30-year low.
META Group Research projects 850,000 IT jobs would go unfilled in 2000. In Utah this
has translated to a high demand for University of Utah computer science graduates. In
the Fall 2000 issue of Continuum, University of Utah, it is reported that starting salaries


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for graduates averaged $49,077 per year and this does not include signing bonuses of
$2,000 to $12,000 plus other perks.

Yet lack of IT graduates only tells one part of the story. Another unique characteristic of
working in the information technology field is the rapid change in the skills required. In
June META Group Research noted that IT project life cycles are 12-16 months as
compared to the more traditional 3-5 years, and that the Internet demands a whole new
set of IT skills created as recently as 3 years ago. Web development has evolved so
quickly that a matter of months can make a difference in specific skills needed. To
respond to this challenge state agencies should also increase the portion of their IT budget
devoted to IT training to keep staff current or risk losing them.

IT differs from other state position classifications because the rapidly changing
technology requires constant updating and replacement of skills. Also since this is the
fastest growing employment sector, the labor market changes faster than the traditional
state classification/salary range system can respond.

Consequences of Not Addressing this Problem
The rapid shift to online services in the private sector has created expectations that
government services should also be available. Citizens looking for online services place
additional demands on state agencies to redesign their processes to provide current
information and the ability to complete online transactions with state; anything from
applying for permits, renewing licenses to making or receiving payments.

State programs are dependent on information technology for its day-to-day business and
require innovative uses of technology to meet the demands of a growing state population.
Without adequate technology support, services provided by non-IT staff are also eroded
and thus the ultimate impact will be on the State‟s customers, its citizens and businesses.

Conclusion
Utah State Government is, must and will transform its basic ways of interacting with its
businesses and it citizens through effectively leveraging its information technology
capital. We are in need of the unique human capital offered by IT professionals skilled in
the latest tools that modern information technology has to offer to make this vision a
reality.

In closing, a quote from Governor Leavitt best sums up our challenge: “An entrepreneur
that I greatly admire, Ray Noorda, talked about change and our adaptation to it in the 21st
Century. He said that when it comes to change, you have three choices: you can fight it
and die; you can accept it and survive; or, you can lead it and prosper.” We believe our
citizens and businesses in Utah want us to lead.




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