My (fictitious) operations manager, Tom, just informed me he is leaving the company. I’m shocked. Tom is a good guy, and we have been investing in his development and going out of our way to make him feel appreciated. He recently received a 12 percent raise, and, earlier this spring, we bought him a new truck. His announcement was completely unexpected. My team and I are scratching our heads trying to figure out what’s going on, and we’re nervously wondering who is going to be next. Tom was not a superstar, but we definitely saw him as a building block. Now we are starting over and it’s frustrating.
Does this scenario hit home with you? Throughout my management career, I have witnessed this situation time and time again. In most of these cases, compensation is not a significant factor. I firmly believe—and a great deal of research confirms—that other factors are much more significant than money when it comes to employee engagement and retention. For example, alignment with the company’s mission, values and receiving meaningful appreciation normally matter much more than compensation. But sometimes compensation is the determining factor, especially when it is perceived to be insufficient or unfair.
When people feel adequately compensated, pay becomes a nonissue. But if there is any sense of perceived inequity in pay, it may become a serious issue because compensation is an expression of a person’s worth to the organization. It’s not the only expression of worth, but it’s an important one. Next-generation leaders and high-potential employees are often seeking validation from every angle. Their level of compensation needs to be in alignment with their expectations or you may convey the wrong message to them.
In today’s talent war, you need to think of compensation differently than you have in the past. The traditional approach to compensation was to hire a person as low on the pay scale as possible, at whatever level the person was willing to accept, and then provide small, incremental annual raises, or slightly higher raises for promotions or additional responsibilities. The goal was to minimize payroll costs. This approach may have worked fine in the past, but it will not work going forward when a more important goal is to attract and retain talent.
A person with even a few years of experience is going to be valuable to your competitors—even more so for someone with three to five years of experience. If your compensation system is not set up to reward your people for this rapid rise in market value, you have placed your employees in a position where the only way for them to realize their market value is to jump ship, even if they don’t want to.
One of my large clients recently conducted a wage study and found that it had a high level of loyalty among employees with more than 10 years of tenure. But the firm was having a terrible time retaining employees within the five- to 10-year range. After some analysis, the company realized one of the key factors was that its pay structure did not coincide with market value as these younger people gained great experience from years two to five.
If you haven’t looked at your compensation system recently, it may be time to do so. Consider the market value of your people at different ranges of experience. Updating your compensation program may result in a one-time adjustment, which may be substantial. However, if it results in holding on to your high-potential people, the investment will be well worth it.
They say it’s not about the money. But sometimes it really is. Now is a good time to take the money issue out of the picture so you can focus on other areas of improving employee satisfaction, engagement and retention.
