Would you give your best talent a 13% pay raise?
Maybe you aren’t quite sure how to answer that question.
Your first instinct could be that it all depends on the context and circumstance—13% is well above salary inflation, which consistently comes in at around 3%. But we’re talking about your best talent, not your average good-performing employees.
Some of you might say, “Well, if we do that, then we won’t be able to afford salary increases for some people—and that’s not fair. And what is magic about 13% anyway?”
Magic? No, however, publicly available research indicates that a talented person will leave your company for another employer for as little as a 13% salary increase. And Forbes famously estimated that the average boost in pay received by workers who leave a company for a new position is 10% to 20%.
So, is it possible you could neutralize that potential talent defection with a 10% to 15% salary increase? We have our own thoughts, but first we decided to ask compensation experts at some of America’s best companies.
The Institute for Corporate Productivity (i4cp) surveyed HR leaders at over 100 companies with whom they have a membership relationship. These leaders were asked three simple questions:
- Does your company have a talent review process designed to identify your best-performing employees?
- Is your company open to creating salary differentiation across the spectrum of employee job performance?
- What is the likelihood your company would consider investing in your best-performing employees with a salary increase in the range of 10-15%?
Going into the survey, we figured that if a company could identify their best employees, and they were open to salary differentiation aligned with high performance, then certainly the majority of these companies would be likely to invest in their top people with a 10-15% salary increase.
Did we foretell that correctly? Well, the answer is “Yes” and “No.”
Yes, 92% of HR leaders responded positively that a talent review process of identifying best employees does exist in their organizations. Whether the process is informal and decentralized by business, or it exists as an enterprise-wide business process, we find this result predictable and encouraging.
And yes, a large majority of respondents (87%) reported a practice of salary differentiation across the spectrum of employee job performance.
However, only 40% of HR leaders surveyed said that were “very” or “somewhat likely” to give their best employees salary increases of 10-15%. This particular result gives me pause. What factors are in play at companies today that would prevent employers from taking this step to reward (and retain) their best people?
The Cost of Living Factor: Some in our survey may perceive that it’s not fair to give 0% to some employees, and 15% to others—when everyone is impacted by the rising cost of living. The political voices today decry decisions that favor one population over another. However, if your business believes in a meritocracy where all employees know they have equal opportunity for recognition and rewards, earning salary increases at the top of the curve should be a common experience for your best people.
The Fear Factor: Some might be concerned they would be playing favorites, or have concerns about the validity of the talent review process. Some might be concerned about exacerbating pay inequities. Others might be wary of seeking approval from Finance and other senior leaders.
A 2019 i4cp study on talent pools found that 31% of survey respondents reported that their organizations were “unwilling or unable to pay at the same levels as their competitors” and they viewed this as a serious barrier to attracting talent. Depending on the organization, these could be legitimate obstacles to overcome. However, are these reasons you can live with when it means losing talent you have identified as your best?
The Reaction Factor: It could be argued that not each and every one of the most talented people in your organization needs a 10% to 15% salary increase to remain loyal to your company. And if true, giving everyone such an aggressive salary increase seems like an unnecessary expense. When it comes to making compensation decisions, some employers choose to be proactive. They have a clear idea of which roles in the company drive the greatest value, they regard those roles with as having the highest priority and they reward the top performing people in those roles with the intent of keeping them in the company for the long-term.
Other employers prefer to be reactive and attend to the compensation concerns of top talent when those persons give indication of job dissatisfaction or intent to leave.
The Affordability Factor: In my experience, the perceived issue of affordability will most often get in the way of investing in top talent. Let’s begin with the presumption your business can afford a 3% salary increase budget across your salaried population of 1,000 employees. Here is a typical distribution of salary increases within the 3% budget:
Now, let’s engage in a quick thought experiment and look at this differently. What if you stabilized the bottom half of your performance distribution with little to no salary increase, and shifted the majority of your increase budget to the top half of your performance distribution? Something like this example, where your top 20% of contributors will get an average salary increase of 10%—on a 3% budget.
Some managers and leaders may struggle with the mere idea of a 10% to 15% salary increase, even for your best talent. However, if you lose that talented person to another employer willing to pay a higher salary, your company will end up spending that much or more to replace that person.
Some entities (such as SHRM) predict that every time a business replaces a salaried employee, it costs six to nine months' salary on average. For a manager making $80,000 a year, that's $40,000 to $60,000 in recruiting and training expenses. And that doesn’t even begin to measure the loss of intellectual capital from seeing one of your best employees walk out the door for a little bit more money elsewhere.
So, there really isn’t a question about whether your company will or won’t incur the employment cost. It’s about how you choose to spend it—wisely.
Mark Englizian is senior strategy advisor for the Institute for Corporate Productivity (i4cp) and Chair of i4cp’s Total Rewards Leader Board. He is the former CHRO of the Walgreen Company and has also held senior HR roles at Amazon and Microsoft. He currently advises Boards of Directors, CEOs and CHROs worldwide on human capital matters.