Compensation: Pay Now or Pay Later

The U.S. economy is improving slower than many Americans would like, but its progress compared to the height of the Great Recession has many employees considering whether they ought to try to improve their situations with new employment opportunities.

Three out of five employees would leave their current position for a competitive offer, according to the “Recruit or Retain Report” from Aerotek Inc., a recruiting and staffing services company. Another study conducted in April by the University of Phoenix found comparable numbers. It reported that 55 percent of working adults are interested in changing careers, and 24 percent are “extremely or very interested” in a career change.

With these numbers in mind, employers must make sure they do as much as they can to retain employees, especially high performers, because loss of key talent could spell disaster for a business in the still-improving economy. However, the answer to retaining employees often lies within an organization’s internal capabilities.

Cash and All the Extras
While money isn’t everything, it certainly doesn’t hurt an organization’s retention efforts. Above-market salaries and benefits are effective recruiting and retention tools. But organizations that don’t have the funds to lead salaries in their industries or geographical areas can take the following steps to make their compensation and benefits offerings work smarter.

Stay vigilant to prevent pay compression. Pay compression occurs when employers set new hires’ starting rates too close to those for current workers. The result is that employees earn similar pay, despite possibly vast differences in experience, skills, responsibility and knowledge. This can be demoralizing for senior employees and cause internal strife for departments and teams.

Forbidding employees from discussing their salaries and benefits is not a viable option. First, it would be difficult to enforce. Also, such a restriction would violate the National Labor Relations Act, which entitles employees to discuss the terms and conditions of their employment. This act applies to both unionized and nonunionized employers.

Pay compression is a result of a misstep in compensation planning. To make prudent salary adjustments, employers should examine pay ranges on a regular — at least annual — basis. Talent leaders can tie associated adjustments to the market by using market salary data or surveys, but these adjustments also should be linked to internal pay data. It may be beneficial to make this process a dedicated duty of a particular position or department. This needn’t be the only role of this position or department, but it should be seen as an important one.

Forecasting future hiring needs and planning an associated compensation strategy can also help prevent pay compression. If an employer determines that pay compression is already in effect in its organization, the first step is to study the pay structure to determine specific causes for the problem. Does a position’s associated pay grade match its job description? Are there differences between same-department positions that haven’t been included in job descriptions or compensation planning? Are salaries adjusted on similar schedules?

Employers will want to examine their pay grade structure in particular to determine whether specific grades are too narrow. Organizations also will want to determine whether particular employees should be promoted or have their pay rates re-examined.

To remedy pay inequity, an organization might look at making equity adjustments, which can be expensive. To limit the financial hit, an employer might adjust workers’ salaries in staggered groups. It needn’t tackle all positions at once. The organization should start with high-performing employees in key positions and work its way down to easier-to-fill jobs.

Consider pay for performance or other merit pay systems. Pay compression and other morale-damaging issues also can result from a standardized, cost-of-living pay increase. When all employees’ pay increases by a set 2 or 3 percent, they lose incentive to become top performers. In contrast, a pay-for-performance program awards greater increases to top performers.

Talent leaders will need to recognize the true meaning of a merit-based program. For instance, when employees are identified as underperformers, do not give them a salary increase. Those funds can then be used to augment top performers’ salaries.

Employers should review their pay-for-performance systems to determine whether they can effectively identify who is a top performer, an average performer and an underperformer. These ratings should be linked to performance reviews and other objective evidence monitored throughout the year.

Take a look at benefits. While only 2 out of 5 U.S. workers would strongly recommend their employer as a great place to work, those who do are three times more likely to be satisfied with their benefits, according to insurance and benefits company MetLife’s 11th annual “Study of Employee Benefits Trends,” released in March.

The MetLife study also found 51 percent of employees report they are willing to bear more of their benefits costs to have a choice of products that meet their needs. This dovetails with the fact that 58 percent of employers say providing voluntary benefits is a significant strategy.

One of the best ways to bring about benefits satisfaction is communication. However, that communication needs to be a two-way street. Employers need to know what their workforce sees as important benefits — or perhaps would see as important if they were better informed. This is where employee surveys and focus groups come into play. Talent leaders also might encourage employees to bring their desires for particular benefits to the employer.

Employees, on the other hand, need to know and be reminded of an organization’s benefits offerings and what those offerings can do for them. An introduction to benefits programs during orientation should not be the last time an employee hears details about specific programs.

Recognize the Best and Promote Development
Perhaps even more important than salary and benefits are recognition and opportunities for professional development. The best type of recognition will depend on an organization’s culture, the situation and individual employees. Recognition can range from a formal rewards program, to a bonus, to a simple “thank you” from a supervisor.

Encourage managers and supervisors to know their employees. Some employees prefer public recognition, while others appreciate a more personal approach. Encourage managers to take the time to understand what inspires each of their direct reports. This information can be communicated to talent managers for use in a companywide formal rewards program or used by the manager for informal recognition.

Make sure employees have the tools they need to meet their personal career development goals. The Aerotek report revealed a positive correlation between employee development and the likelihood of retention. However, nearly one-third of employees surveyed reported having no ongoing training in their jobs.

Talent leaders should find out what opportunities best fit the employee’s personality and desired career path. For instance, consider implementing a structured career development plan for some or all employees. This can help talent managers identify what opportunities would be best suited to an employee’s personal goals as well as to the organization’s needs.

Don’t forget free development opportunities. Something employees often crave the most in their professional lives is often the easiest benefit to provide: empowerment. Give employees what freedom and trust is possible and watch them flourish. Further, most employees, especially high performers, crave recognition for their work. Increased responsibility should come with increased autonomy.

Keep employees in the loop. Imparting company news and information can have multiple benefits for employees, employers and retention rates. It can give employees context on how their individual jobs fit into the company’s culture and strategic plan. This information also can provide workers with more insight into what accomplishments, experiences and skills equate to success in and for the organization. Further, regular updates about the status of the company can calm some employees’ fears of the unknown — reducing their stress levels and improving morale and wellness.

Just Ask
A company’s turnover rate will indicate whether there is an employee satisfaction problem, but it won’t explain what the problem is. One way to find out what is going on is to use employee surveys. In a survey, employers can ask a variety of questions to determine how satisfied employees are in their jobs. For example, the survey may ask new hires if their jobs are what they expected them to be. Or, they can ask employees if they see opportunities for advancement and professional growth. By surveying the workforce, an organization may discover problems it didn’t know it had.

Employee turnover is expensive for an organization. Filling a position can cost an employer up to two times a position’s annual salary in lost profits, lost productivity, and replacement and recruiting costs. It is in an organization’s best interest to do whatever it can to retain successful employees. Proper compensation and recognition planning is one thing talent leaders can do to ensure high-performing employees stick around for as long as possible.

Rebecca Bentz is an associate editor at compliance consultancy J. J. Keller & Associates Inc. She can be reached at