Retaining vs. Hiring – A Discussion on Salary

I was reading “Employees Who Stay In Companies Longer Than Two Years Get Paid 50% Less” in Forbes. One of the questions the author asks is: “Why are people who jump ship rewarded, when loyal employees are punished for their dedication?” While I think that implies intent to “punish” employees that I don’t believe is actually there, it does hit on a real question that has an impact on engagement and retention: “Are we over-prioritizing new hires in an unfair way? If so, why?”

The Greener Pastures Equation

Let me start by addressing why you are able to, often, command a higher salary by jumping ship. The company posting a job is feeling a very distinct pain in their organization that drove them to open a requisition. There is a sense of urgency to address it and a budget has been set for the role. Other employees are investing time they could be spending on another task in filling the requisition (your recruiting/hiring team) and/or potentially doubling up on their duties while the role is unfilled. This creates momentum behind the effort to add someone. So long as the role sits unfilled, it’s costing the company in some way. That’s an important motivating factor.

Early in the process, the recruiting team narrows in on people who match their target for skills, salary and start date. This is the company’s biggest leverage play – if you don’t fit, you aren’t moving on in the process. But once they find a candidate who fits, the leverage shifts a bit. It’s the candidate who decides the terms under which they’ll join the organization. The company must weigh the cost of continuing the search with being flexible in salary. It makes sense that this results in a higher level of compensation than an internal adjustment – a candidate isn’t often willing to assume the risk of a new organization without getting something in return.

It’s easy to forget in the overall equation that there is a very real cost (money and time) to candidates on the market. Candidates invest time sending resumes, networking, interviewing and researching – time that they could be spending on something else. They risk their current workplace finding out and need to prepare themselves for the emotional rollercoaster of pursuing jobs you like but don’t get. The search still isn’t guaranteed to result in an increase in salary. Heck, in many cases, the search doesn’t pay off in a meaningful way and the candidate abandons the search and sticks with their current company and hopes for an adjustment there.

The Devil You Know Equation

That header is hyperbolic, for sure, but let’s dig into the truth of it anyway. There is something to be said for any potential jobseeker staying in an organization they know and are comfortable in, instead of taking a risk on an unknown and ending up in a nightmare. I would argue that most people staying in a current job are actually getting something in return that has value to them. Maybe it’s the commute, benefits, work, pain of finding another job or their amazing co-workers. Each person assigns their own monetary value to that stability when deciding whether to go to market with their skill set; everyone’s risk tolerance is different.

So let’s talk about why it’s easier to get a 5% or 10% increase by leaving an organization than by staying – it all goes back to an organization feeling pain. When there is an open seat, work is just not getting accomplished. Progress is stifled. It comes up in leadership meetings and sometimes board meetings. Metrics are impacted and people are focused on fixing the issue ASAP. This gets a manager in with finance, where they can make a case for additional budget based on the current market rate for the role. And, voila, a role is open at a competitive rate.

A lot goes on in running a company, and it’s easier to focus on issues causing pain when you have limited bandwidth. A failed marketing campaign. A broken product feature. There is nothing more nefarious at play when new requisitions receive priority – it’s distinctly human. If you see a broken limb, you are more likely to go to the ER. Your high cholesterol could actually be a much bigger risk to your health, but you aren’t feeling it in the moment and we’re just not as good focusing on preventative measures, right?

Employees who are on board are performing a role. They may be feeling pain or the itch to hit the open market, but management isn’t feeling it, so management’s focus is elsewhere. After all, there is a process to look into salary regularly. It’s difficult and reactive to treat every single employee’s comp like a burning fire daily – you need to have some visibility into how changes as a whole will impact a business. But if there’s a lack of clear process and philosophy on compensation, you run the risk of employees wanting to leave.

The article I linked seemed to imply that companies keep salaries low because they can. I don’t think that’s the case. Compensation is really hard to balance and get right. I like to look at it like putting together a winning sports team. Your goal is to achieve great things, but you only have a certain pool of money to do so. Some companies have short term goals – they have a bunch to spend and need to succeed almost immediately. They’ll pay at the top of the market for other teams’ free agents and want “sure things”. Some others look long range and expect that if they are doing things correctly, they will lose people to free agency. But they focus on balancing it with bringing in the right free agents, retaining solid talent and drafting high-potentials that may be hit or miss (and may leave for another organization).

Neither is the wrong strategy, but it is felt differently on the employee level. Teams – and companies – are more apt to look at market data when a position is open and they need to compete with others to fill it. That doesn’t mean that there isn’t a way to incorporate revisiting the market annually for non-open roles in a fiscally responsible way. But it’s neither practical nor prudent to pay at the top of the market for every role across the organization. And employees sticking around are receiving something worth trading off a higher salary for, or most wouldn’t be sticking around.

Wrapping in a Sentence (or Three) …

It’s a tough balancing act for both sides; each is trying to balance risk, short-term gains and long-term stability. The best companies straddle the line enough that there isn’t a steady stream of defections that impacts profitability; the best employees leave when they feel the mix of salary, growth and other benefits no longer matches their needs. It doesn’t, in and of itself, mean either side is wrong or disloyal for the tactics they’ve selected – it’s just sound business for both sides.

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