[ajross]

Honestly I think 2) is the more common mistake. Yes, employers should be looking to offer regular raises that match what an employee "could" get on the market, but that's hard even when you have the funds available and your employees' best interests in mind.

On the other hand, it's absolutely routine in my experience to watch managers bend rules and ignore feedback to bring in very expensive "senior" people to the team (often based on nothing more than a resume). All the incentives are wrong for this: everyone wants senior underlings, there's the "prestige" value in buying expensive commodities, you want to feel like your team is in the "big leagues".

And if done badly it can do terrible damage to a functioning team. It's never good to bring on an unproductive employee. Unproductive architects will kill your product.