In this article, we explore three current and critical compensation problems that cause employers to lose talented employees. These issues include low salary increases, lack of differentiation in pay by performance, and difficulties finding the actual "going rate" for jobs.
Problem 1: Low or modest salary increases
Salary budgets have been lagging for 3-4 years, pay increase budgets are not growing rapidly, and the outlook for significant pay raises is fairly bleak. This means that your employees' salaries probably aren't growing. What happens when the market doesn't match what your employees want? Should you keep your pay practices firmly aligned with the market, or adjust them to what your employees want?
The answer will depend on how significant compensation is to the retention, motivation, and engagement of your employees. Sooner than later, you'll need to make a professional judgment about whether it makes sense to go above or outside of the market trends to retain the people you want to keep or motivate performance to higher levels. The market should factor into your decision, but shouldn't be the only factor by which you base pay decisions. Here are some ideas:
- Obtain a pulse - gather feedback about compensation via surveys, exit interviews, and meetings to understand the importance of pay to your employees.
- Understand what employers of choice are doing. In our research, we find that employers of choice actually provide significantly higher pay increases than other organizations.
- Devise creative compensation programs which tie performance to increased pay. Make opportunities available to earn more pay, so long as financial performance improves.
Problem 2: Little differentiation of pay by performance
Should you meaningfully differentiate compensation or pay increases by performance? Does it matter? Recent research shows that differentiating pay may matter more than we probably think it does, particularly with regard to retention. In fact, those flat cost-of-living or across the board adjustments that you provide every year may be giving your top performers more incentive to leave.
In "The Effect of Relative Compensation Dispersion of Firms on the Mobility and Entrepreneurship of Extreme Performers," published in the Strategic Management Journal earlier this year, researchers found that low differentiation of compensation (termed "compensation dispersion") increases the likelihood that high performers will exit an organization.
Meanwhile, high differentiation of compensation based on performance increases the probability that low performers will exit. This research supports several other studies which have found an important link between differentiation of pay and turnover.
Problem 3: Difficulties finding the true "going rate" of a job
There is a tendency in the HR profession to use salary surveys to determine "going rates" for positions. Unfortunately, using only this approach can sometimes result in feedback from employees or job seekers that your pay rates don't necessarily match up to competitors. This feedback can be confusing if you are trying to provide fair, consistent, and competitive salaries.
Salary surveys are based on a sample of organizations. They are intended to provide insight regarding what other organizations are paying for positions. Salary figures represent just those of the sample from the survey - those organizations that submitted data for a given job. Salary surveys provide you with data to make informed, professional evaluations regarding how to pay someone. They are important in setting pay rates, but not solely on their own.
Similarly, it's important to be aware that when you use the "going rate" for competitive pay (i.e. average or median) in salary surveys, this means that approximately half of organizations in the survey are paying more than your organization (Source: BLR), which may still put you behind many of your competitors in terms of your compensation practices.
Salary surveys aren't the only resources you can use to make salary decisions. Custom surveys of competitors, job seeker feedback, recruiting firms and sources, industry resources, and job evaluations are other good practices to use to make pay decisions. Ultimately, it's your interpretation and analysis of all of the data and insights that counts most when making compensation decisions and helps you achieve a better understanding of the true "going rate" of a job. Compensation is as much of an art as a science.
In our research, we find that compensation heavily influences retention. Not only is compensation cited as a consistently important factor when seeking a job; but it frequently emerges as a vital predictor of retention and engagement. Employees can and frequently do leave their employers because of pay. That's why it's important to solve these pay problems before they result in an even bigger problem: turnover of your high performing employees.
View ERC's Wage & Salary Adjustment Survey Results
The survey reports data from Northeast Ohio organizations regarding their actual and projected wage and salary adjustments.