3 Ways Compensation Policies Can Cause Employee Turnover
July 30, 2018
Did you realize that the way your company approaches compensation policy can actually create (or reduce) employee turnover? If keeping your people is a priority in today’s tight talent market, you need to look at whether your pay practices are competitive enough to keep workers from heading for greener pastures.
What Causes Employees to Decide to Leave
Both employers and employees believe workers need to leave their organization in order to achieve higher pay and career advancement, according to the ADP Research Institute® report, The Evolution of Work 2.0: The Me vs. We Mindset. The report explains this is a global phenomenon with varying viewpoints depending on the country:
- In every country except India, Netherlands, U.S., and the U.K., employers underestimate the percentage increase in compensation it would take to prompt an employee to change jobs.
- The biggest gap is in Latin America where employees will consider moving for a 19% rate, while employers think it’s 16%.
- Latin American workers and some in the Asian Pacific countries, in particular, are most prone to job hopping. In these regions employees are loyal to their jobs but move for additional experience and greater career advancement (instead of compensation alone).
3 Ways Compensation Practices Can Lead to Retention Risk
Below are three examples of how attention to compensation can uncover potential retention risk.
1. Organizations that lag the market rate in a specific job function should expect to see higher turnover in that role
If accountants at one business, for example, are always paid at 75 percent the market rate at one employer, there could be higher turnover than those that pay 100 percent or higher market rates.
2. Organizations that have rigid compensation policies and practices may be causing employee turnover
For instance, if an employer sets a policy that limits pay increases for those workers with less than 18 months on the job, then high performers may leave before that time period elapses in hopes of higher pay at another competing organization.
Instead of annual raises based on yearly evaluations, some organizations are moving to more frequent opportunities for both feedback and increased compensation.
3. Organizations that routinely pay new external hires more than internal staff will risk losing longer-term employees.
The Society for Human Resource Management reports that a new hire typically receives 18 to 20 percent higher pay than an internally promoted employee. This can actually encourage employees to leave and find higher paying positions elsewhere.
While not an all-inclusive list, these examples provide a broad view of how compensation decisions that are seemingly unrelated to employee engagement can ultimately cause someone to leave the organization if left unchecked.
Use Compensation Benchmarking as a Retention Predictor
Deloitte’s 2017 Human Capital Trends Report reveals that nearly 80 percent of global organizations view employee experience as an important concern for both engagement and retention. While retention itself is a complex issue that touches many facets of the employment relationship, looking at these issues critically can help business leaders to prepare for, and mitigate, retention risk.
- The first step is to gather and cross-reference turnover data with pay practices, compensation activity, and compensation benchmarking information.
- Once a trend or opportunity for improvement has been identified in the data set, the talent leader can apply that model to existing employees, prioritizing high-value or high-potential staff.
Retain Employees with Fair Pay and Raises
If the standard practice is to maintain salaries for new hires for the first 18 months on the job, but it’s clear that a large number of workers are leaving at the 12-month mark, then the organization can run an experiment. For a small pilot group of new hires, the employer can adjust pay rates at 12 months on the job, evaluating if the practice enables the organization to retain those workers longer than the average new hire.
Another example might relate to hiring and compensation practices. If it’s determined that paying external hires more than internal staff has caused higher turnover for a specific employee population, then the employer can turn its sights to either changing the existing practice or planning a targeted risk mitigation strategy for retaining any high priority staff members.
Understanding and effectively managing compensation differences across your organization is important to keep the people who are doing great work and to stay competitive to attract the best new talent.