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I keep waiting for someone to come up with some kind of explanation for this that even sorta makes sense. No, as far as I can tell, companies just work this way.
Well, I'll give it a shot.
Part of it is that they can't know the point that someone is willing to stay vs leave, and they're always optimizing for that point. Saving money is always the goal for expenses in a company.
Part of it is that they have a budget that they can't exceed. Sometimes a person is overqualified for the job, and the job simply can't afford them. Sometimes that person will stay far longer than they should, when they could get paid much better elsewhere, and sometimes they choose to move when they're only slightly underpaid for their skills.
Part of it is that there is more to a job than money. Being comfortable, un-stressed, and generally happy is more important at some point than more money. The company tries to balance these things, as it's often cheaper to relieve or prevent stress than pay someone to put up with it.
In the end, it's super complicated, but all about money, on both sides.
I'll bite, too. The reason the status quo allows systemic wage stagnation for existing employees is very simple. Historically, the vast majority of employees do not hop around!
Most people are not high performers and will settle for job security (or the illusion of) and sunk cost fallacy vs the opportunity of making 10-20% more money. Most people don't build extensive networks, hate interviewing, and hate the pressure and uncertainty of having to establish themselves in a new company. Plus, once you have a mortgage or kids, you don't have the time or energy to job hunt and interview, let alone the savings to cover lost income if the job transition fails.
Obviously this is a gamble for businesses, and can often turn out foolish for high-skilled and in demand roles — we've all seen many products stagnate and be destroyed by competition — but the status quo also means that corporations are literally structured — managerially, and financially — towards acquisition, so all of the data they capture to make decisions, and all of the decision makers, neglect the fact that their business is held together by the 10-30% of under appreciated, highly experienced staff.
It's essentially the exact same reason companies offer the best deals to new customers, instead of rewarding loyalty. Most of the time the gamble pays off, and it's ultimately more profitable to screw both your employees and customers!
To add to that last point, I worked for a company (at retail) that claimed to know that keeping customers was cheaper than getting new ones, and corporate even implemented a policy where the clerks on the floor had up to $100 to keep a customer happy. I never once saw that $100 used, and the one time I tried to keep a customer (who had just spent $3000) happy, management refused to let him return a crap $100 printer because he didn't have the manual in the box. He had left it at home, and was glad to bring it in next time he was in. Nope. And that incident was within a week of implementing that system.
So even when a company understands that point, it's still really hard to make good on it at the levels that it can matter.
It's almost like corporations are incentivized to be greedy and parasitic, instead of investing in their customers and workforce? I call it vulture capitalism.
He said in the article:
When hiring someone new, companies are forced to play in the open market, competing for top talent. But internally, they create opaque and informationally asymmetric compensation structures designed to minimize growth for existing employees to save the company’s bottom line.
So yes, this is totally just how many (most) companies are run. I work in healthcare and have faced similar issues, where someone I hired as a new grad who accumulated 5 years of experience with me would be making $20K less than someone I just hired who had 5 years of experience somewhere else. I always had some words for anyone who tried to talk to me about retention rates
Think of it from the company's point of view. If you're hiring a new employee then the options for a good candidate are a) move jobs and work for you, b) move jobs and work for someone else. You're competing with other companies.
If you're reviewing an existing salary for a good employee their options are a) do nothing and accept the shitty raise, b) move jobs and work for someone else.
Moving jobs has significant cost for most people - it's time consuming, stressful, might involve moving house, etc.
That downside gives employees who haven't proven they are looking for a new job a significant negotiating disadvantage.
If you really want you can tell your boss you are actively looking for new jobs. That will increase your chances of getting a bigger raise, but of course it has other downsides so most people don't do that.
There's downsides to the companies, though. Interviewing new candidates takes money, and takes time away from people already on the team. If everyone is switching jobs to get a higher salary, then companies aren't saving anything in the long run. They also have a major knowledge base walking out the door, and that's hard to quantify.
It's a false savings.
If I were to steel man this, it'd be cross-pollination. Old employees get set in their ways and tend to put up with the problems. They've simply integrated ways to work around problems in their workflow. New people bring in new ideas, and also point out how broken certain things are and then agitate for change.
This, I think, doesn't totally sink the idea of the "company man" who sticks around for decades. It means there should be a healthy mix.