Money isn’t quite the motivator it used to be in terms of employee retention. Today employees don’t just want to know that they are earning a decent salary, they want to know it compares favourably with both their peers and industry standards. If they find out they are earning below par it can be a big demotivating factor. So how can companies best manage salaries to ensure employee retention?
Companies are always seeking to optimise their salary spend, but they need to look at this from a broader perspective. Retaining good employees is far more cost effective in the long term than having to recruit and retrain new people. An employee who is earning a standard annual increase may be happy with their earnings, until that is they find out that a new recruit is earning much more or that what they earn is not quite on par with what is being offered elsewhere.
The younger generation of employees is less risk adverse and therefore quite willing to move when better opportunities present themselves. Companies that don’t offer competitive salaries or band peer salaries in the same bracket could find themselves losing some of their best employees because of this.
What peer compensation means to employees
An article published in the Scottish Journal of Political Economy, 2017, Vol. 64 No.1, titled Monetary Reference Points of Managers – Empirical Evidence of Status Quo Preferences and Social Comparisons; supports this view highlighting the effect of peer compensation on job satisfaction.
According to the article, job satisfaction is directly proportional to whether employees perceive that they are being fairly or more than fairly paid, and declines if they feel they are being unfairly paid compared to their peers.
But does this apply to all employees across all levels, genders and industries? Interestingly enough, women didn’t seem as affected by peer earnings as men provided they were satisfied with their own earnings. The job satisfaction ratio was also more applicable to people on fixed income rather than those on commission or variable salaries. In terms of management positions peer salary levels were a major deciding factor in setting management salaries. Younger employees also seemed more concerned with peer earnings. This has been attributed to the fact that being younger, they see peer earnings as an indication of possible future earnings and align opportunities accordingly.
What companies can learn from this
Businesses need to benchmark salaries with consideration of both internal salaries as well as external competitor salaries. Employees are likely to compare their earnings and business need to be aware that if they are paying below par, it’s highly likely to lead to a level of job dis-satisfaction. Informing and educating employees as to the compensation policies as well as the benchmarks can help avoid job dissatisfaction because it helps employees to manage their expectations. This also give employees something to work toward if they are just starting out in their careers and want to move up within the organization.
Offering competitive salaries enables companies to attract top talent. Despite the fact that women are not as concerned with peer earnings, they do still need to feel that they are being paid their worth, so this should not be viewed as an opportunity to offer less, just because an employee is female.
But most importantly bench-marking policies should be part of a greater strategy to retain good employees. Understand what their expectations are and what’s important to them in terms of compensation. The trend is also leaning towards other employee benefits such as flexi-time or work from home options, recreation facilities or incentives for employees to maintain a healthy lifestyle. For some people these benefits may be more valuable to them and be seen as just as worthwhile as a higher salary.
The working environment is becoming more transparent as it’s becoming easier to obtain information relating to salaries and compensation packages. A simple online search can reveal what positions are available in the industry and what salaries are being offered. Employees do not need to be actively searching for another job to know what other options are out there. Salaries may not be the sole deciding factor when employees are contemplating staying or going, but perceived fair earnings can certainly tip the scales in terms of job satisfaction.
Employee retention is vital for a business that wants to achieve a healthy growth curve. It creates continuity where expertise is being added and built on rather than having to be renewed every time a new employee is brought on board. Including bench-marking in human resource management is a wise move, one that can not only grow the business, but help ensure that employees enjoy a great level of job satisfaction, knowing they are being fairly rewarded for their efforts.
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