Beware of Oncoming Turnover

By Brad Federman and Jennifer Blake

Compensation has short term motivational power. Pay is not a tool that creates sustainable engagement.  Companies that attempt to utilize pay to satisfy their employees will consistently fall short.  On the other hand, compensation can and often is a source of dissatisfaction when it is not competitive.  Now is the time to be concerned regarding the competitiveness of your compensation program.  Beware of oncoming turnover. People are already leaving companies, and it will only get worse. 

One of the significant benefits touted by those in favor of the Tax Cuts and Jobs Act of 2017 was the positive impact it would have on jobs and employee pay. The expectation was, with the corporate tax rate dropping from 35% to 21%, companies would use some of those tax savings to invest in the salaries of their employees.

Some corporations shared part of their savings with employees in the form of bonuses and increased salaries. For example, First Tennessee Bank paid about 70% of its workers a $1,000 bonus at the end of 2017 and, in the first half of 2018, the bank increased the base wage rate for current employees to $15 per hour.

In April 2019, Bank of America announced it is raising its minimum pay rate to $17 per hour, and increase pay in increments to $20 per hour by 2021. Additionally, the bank froze health care cost increases for lower-paid employees. The bank’s Chairman and CEO, Brian Moynihan, stated, “With the success our company has . . . we have to share success with our teammates.”

Several large retailers also announced plans to raise their minimum wages to the $11 to $15 per hour range.

Generally, however, wages don’t seem to be keeping up with other economic indicators, such as accelerating growth in GDP and steady job growth. The WorldatWork 2018-2019 Salary Budget Survey found the average salary budget increase predicted for 2019 was 3.1%, compared to 3.0% in 2018. Salary budgets have increased ever so slowly since 2009 when the average budget increase was 2.3%; that’s less than 1% over the past ten years.

With a tight labor market, low unemployment, and a healthy market, why aren’t employee wages going up? Josh Bersin, founder of Bersin by Deloitte, is a global industry analyst covering HR talent, leadership, and HR technology. Bersin suggests an interesting theory regarding the lack of salary growth in his October 31, 2018, online article on Forbes, “Why Aren’t Wages Keeping Up? It’s Not the Economy, It’s Management.” His theory: HR and business leaders are afraid to raise wages.

Bersin points to an economic term called “sticky wages”, when workers’ pay doesn’t adjust quickly to changes in labor market conditions. Bersin states:

In this theoretical construct, wages are slow to rise because they’re even slower to fall. So, managers hold on to cash and delay salary increases because they know how hard it will be to cut them later.

One of the major flaws of this theory, Bersin points out, is that when a business downturn does happen, the company doesn’t have the option of reducing pay because their employees are already underpaid. They are then forced to lay people off.

So, what would happen if your company was paying people fairly all along? Here is one possibility.

At one point in my career, I began working for a community hospital that was recovering from a difficult economic downturn. During the economic crisis, in place of reducing wages or instituting layoffs, the employees came together and agreed to take voluntary time off without pay (at measured intervals to ensure patient safety). The hospital recovered and increased its profile in the community as a great place to work. The experience seemed to bond employees together in a way that, as a newcomer, I envied!

Voluntary turnover is now at a ten-year high. If your organization has not yet been impacted by increased turnover, it probably will be soon. According to Mercer’s 2018/2019 U.S. Compensation Planning Survey, 78 percent of business leaders put retention at the top of their organization’s list of concerns, and attracting applicants was a top concern for 73 percent.

Employers who recruited talent recently can tell tales about the tight labor market. Recruiters complain about candidates not showing up for interviews, or worse, not showing up for their first day of work! ManpowerGroup’s Employment Outlook Survey for the second quarter of 2019 shows 24% of U.S. employers have plans to hire and 72% plan to keep their workforce levels steady. For employers, it is NOT a buyer’s market.

Although employers do not have control over all the variables that make attracting, recruiting and retaining talent, a challenge, fair and competitive pay is an element which many organizations can control. Unfortunately, too few employers are intentional, strategic and proactive when it comes to managing their compensation plans.

Be Intentional

Organizations are intentional about pay when they can articulate their overall philosophy about total rewards. An executive leadership team that knows its mission and how to operationalize it, also understands that planning for and managing total rewards is a critical part of any strategic plan and operating objectives. A well-defined compensation philosophy will identify the organization’s total rewards elements, how the total rewards support the overall business strategy, and define the organization’s competitive market position relative to pay and benefits.

Be Strategic

For many hiring managers, strategy means finding out the pay expectations of their top-choice candidate and doing whatever is necessary to get HR to say “yes.” A strategic pay plan, however, relies on the organization’s compensation philosophy to guide the development of pay and benefits that will attract and retain top talent from the competitive market. The competitive market might be different for various types of jobs, which may require slightly different pay strategies.

Compensation strategy means making thoughtful pay decisions based on data and the organization’s values regarding fair pay among its workforce. For example, if the organization already identified specific jobs that are especially market sensitive, factor in offering candidates a premium hiring rate into the pay plan. No one is surprised, and internal equity is not compromised.

Be Proactive

Pay plans are not carved in stone (the last decade notwithstanding). Employers who maintain an understanding of the competitive salary market and consistently update their pay plans, will attract, recruit and retain talent from a position of strength. Hiring managers can look top candidates in the eye and make salary offers with confidence.

When the market shifts, proactive employers don’t wait for employees to come groveling for a raise. When increases in pay are warranted based on market indicators, pay ranges and employee salaries, if necessary, are adjusted accordingly.

Typical fallout from pay plans that are not regularly updated is compression, where new hires receive pay the same or more than current employees. Today’s hiring managers need to remember they are operating in a seller’s market. Employees who feel slighted or stuck have options. Namely, they can leave their company and accept a new job elsewhere, one that pays five to ten percent more than what you’re paying them.

While recruiting top talent is a multi-faceted proposition with many moving parts, don’t overlook the obvious. If your organization’s pay practices are out of sync with the market, fix it. Although candidates evaluate many factors when considering job offers, if your salary offer isn’t even in the ballpark, you will have struck out in the first inning. When it comes to your current workforce, pay may not be the reason employees stay with your organization, but in this environment, it can be the reason they leave.