Ian Mashiter has seen the labor shortage up close. The entrepreneur recently interviewed a technology marketer for a job at his high-tech startup in Boxborough, Mass. "He wanted $95,000 plus bonus to join us. He wanted a nice fat increase to come to a startup," Mashiter says.

Mashiter didn't make that hire. But with the U.S. jobless rate at 4.6%, it's clear that one classic small-business hiring strategy is falling out of fashion --lowball salaries and compensation with stock options. With real salaries to pay, small technology companies are under even more pressure to get a product out fast and make money. Mashiter's 16-month-old Ennovate Networks expects to live on venture capital for a few more months. "It's making it hard for us to control the burn rate," he says.

Mashiter's experience is borne out at small businesses across the U.S., a survey of accounting, finance, and information technology salaries shows. Robert Half International Inc., a staffing company specializing in these fields, projects U.S. starting salaries in accounting and finance will rise by an average 4.7% in 1999, after a 3.1% increase in 1998 for companies of all sizes. The salaries of information technology experts in 1999 are expected to jump even more -- an average 7.3%. That's more than double the 3.5% rise forecasted for 1998, RHI says. Reflecting the boom in Internet use, Web developers can expect a 14.8% increase in starting base salaries next year, ranging from $47,000 to $65,500. And Webmasters are close behind with a 14.7% jump, putting them at $51,500 to $73,000.

What's more, with the economy still growing handsomely, small businesses are under pressure to narrow the gap between their pay scales and those of larger businesses. A breakdown of the RHI figures shows that for some functions, salaries for small companies -- those with up to $25 million in annual sales -- are rising faster than those at larger companies. "They're leveling the paying field," quips Lynn Taylor, director of research at RHI, located in Menlo Park, Calif. "Large firms pay so much more." Chief financial officers and treasurers at companies with less than $50 million in annual sales will have base salaries from $67,750 to $92,000, up 3.1% from 1998. The increase for larger companies is projected to be 1%, ranging from $242,250 to $319,250. Nonsalary compensation such as stock options aren't counted.

WORKER BEE WAGES. The biggest discrepancy in salary growth rates isn't at the upper echelons, either. Starting salaries, on average, for accounting clerks at small companies will increase 10.3% next year, compared with 5.7% at companies with more than $250 million in sales. The rise for midsize companies (from $25 million to $250 million in sales) is also expected to be 10.4%. Of course, small businesses will still have a way to go to match larger competitors. That same clerk's job will have a salary ranging from $19,000 to $24,000 at a small concern vs. $23,250 to $27,500 at a bigger company. At all size companies, financial professionals with one to three years' experience should also reap higher increases than seasoned veterans in many positions next year, RHI projects.

What's the reason for the upward pressure on junior wages? A huge demand for entry-level staff, says Taylor, with the flood of workers from the baby-boom generation beyond that stage now. "Worker bees are necessary to keep pace with the economy," says Taylor. "If you have too many chiefs and not enough Indians, you're in trouble." Another reason that young workers are making more: They grew up using computers and have badly needed technology skills that older workers often don't.

Of course, the wage pressure isn't uniform across the country -- but it's certainly at its most intense in technology hot zones such as Boston and the Silicon Valley. Jerry Hall, who's in the process of forming an Internet consulting company in Santa Clara, Calif., says he hopes to avoid some of the hiring competition by buying other tiny startups outside Silicon Valley, mainly for their teams. "One company in Southern California we talked to said all the partners are pulling down $80,000 a year and expect to maintain that. In the Valley, we thought we'd have to pay 20% more," he says. In that hothouse environment, the competition isn't just from big companies, Hall adds. At his previous startup, he found himself tussling to win certain employees with other entrepreneurs, who were funded by the same investors as his company. "We had to tell them to call off the dogs," he laughs, referring to the investors.

The salary shift is also likely to affect small companies that have relied on outsourcing in the form of higher prices. Mark Murphy, chief operating officer of Sapphire Group, an Internet software startup in Manassas, Va., says his company has so far managed to use stock options and the lure of a new company to get key technical employees to take lower pay. But he expects the clerical functions the company has outsourced to become more expensive.

That's likely, says RHI's Taylor. Her company leases the skills of high-level "temps," such as chief financial officers, often for new companies. "Logically, there's going to be upward pressure on what we pay our consultants."

With the economy still expected to slow next year from the Asian crisis, Bill Dunkelberg, chief economist at the 600,000-member National Federation of Independent Business, says he expects that companies will not fill some of their openings. "I think what people have decided to do is not get into the bidding. It drives all their labor costs up," he says. That's an option a lot of entrepreneurs may have to resort to.

By Julia Lichtblau in New York
julia_lichtblau@businessweek.com

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