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Lead, Match, or Lag: How Your Relative Pay Positioning Affects Your Recruiting

Editor’s Note: This piece was written by Brian Anderson, HR Copywriter with BambooHR.

It can be tempting to dismiss recruiting as a simple project, a one-time task to take care of as quickly as possible. The SHRM Human Capital Benchmarking Report found that the average cost per hire for companies was $4,129 in 2016, and the average time to fill a position is 42 days. Reducing these numbers provides a quick win to show the CFO, which might give you some extra wiggle room in your recruiting budget.

But focusing on time-to-hire in isolation of other metrics can lead to tradeoffs in productivity, employee engagement, and retention levels. At worst, this leads to repeating the hiring process when an unbalanced hire leaves your organization—multiplying the figure that you intended to reduce.

But focusing on time-to-hire in isolation of other metrics can lead to tradeoffs in productivity, employee engagement, and retention levels.Click To Tweet

To win in recruiting, many factors come into play. One factor that can make a huge difference in the long-term results of your people-related decision is your compensation program, and how employees perceive their pay relative to others. Below, we’ll introduce this framework of relative pay positioning in the context of a compensation plan, and discuss how your relative pay positioning affects your recruiting efforts and your ability to retain talent.  

Recognizing and Supporting Your Employees’ Development

Compensation is an important part of the employee experience. It supports your employees in all of their individual needs, from their personal development to their professional capacity. But like your employees, compensation also needs room to grow.

Your employees are constantly evaluating what they’re worth and making comparisons with their current compensation—to the market in general, to others in your organization, to their previous salaries, and to their future plans. They’re assessing whether your compensation is leading, matching, or lagging compared to their expectations, and these assessments shape their experience with your organization and their opinion of themselves.

Like it or not, we tend to define ourselves by our jobs, so when compensation lags, it has a direct impact on our well-being. Underemployment can lead to low self-esteem, relationship issues, and even physical issues such as alcoholism as underpaid employees try to make do with less. There are also social effects, as underemployed people feel embarrassment every time someone asks them, “What do you do?”

In a strong job market, employees won’t stay for long if your compensation lags behind. They won’t risk having that kind of experience.

In a strong job market, employees won’t stay for long if your compensation lags behind. They won’t risk having that kind of experience.Click To Tweet

Relative Pay Positioning Puts Compensation in Context

Relative pay positioning is a framework that helps you analyze the message that your compensation choices send to your employees. Your compensation will stay comparable with the market rate for a given position, lead the market, or lag behind. Staying close to the market rate avoids the tradeoffs in employee experience that happen at the extremes.

Effective relative pay positioning relies on two important assessments. First, you need to have current pay data for your local market (which may vary from national averages). Then you need to have an accurate assessment of how an employee’s skills and experience match to those categories. And this number changes over time as the market fluctuates and as the employee grows into their role.

Avoiding the Curse of the Golden Handcuffs

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So if falling behind leads to stress and anxiety, is it better to get as far ahead as possible?

One recruiting strategy involves offering the highest compensation in the market for important positions. Recruiters call these golden handcuff agreements, and it’s an apt name. After an employee accepts a golden-handcuff-style contract, they’re locked into working with the company to keep up their lifestyle.

Does more money always translate into greater happiness and improved productivity? When you invest in golden handcuffs, do you get what you pay for?

A study referenced in Harvard Business Review (HBR) found that the overlap between salary and job satisfaction was just 2 percent. Furthermore, the correlation between pay and pay satisfaction was only marginally higher (4.8 percent overlap), meaning that people’s satisfaction with their salary is mostly independent of their actual salary. This held true for both the top and the bottom half of the salary ranges analyzed in the study.

But wait, you’re thinking, if money doesn’t have much to do with satisfaction, then why are employees dissatisfied with lagging salaries? Psychologist Frederick Herzberg explained it with a two-factor theory: providing basic human needs decreases dissatisfaction to a neutral level, while a different set of human needs builds motivation for people to perform.

In terms of salary, think of it this way: if you’re not paying people enough to survive, then they experience dissatisfaction. But after they have enough for their needs, then adding on additional money has diminishing returns.

HBR’s analysis of the issue pointed to research which suggests that adding additional extrinsic rewards for tasks decreased people’s intrinsic motivation to complete those tasks. Another study they examined found that intrinsic motivation was strongly linked to employee engagement and performance. Or in other words, it’s possible to lose the productivity that comes from engaged employees by making it all about the money.

And if you’re paying one special employee more than all the others, you’re running the risk of your employees drawing unfavorable salary comparisons, possibly even deciding that your pay practice is discriminatory.

So what can recruiters do to both attract and keep candidates?

Start with Knowledge

You can’t apply relative pay positioning without knowing your local market. By local market, we are really talking about two markets. First, you’ll want to make sure that your starting salaries are enough to provide workers with a reasonable standard of living for your location.

Next, you’ll want to define your talent market and make sure that your salary ranges are on par with what your competitors would spend for this type of talent. For example, let’s say that you are a mid-sized apparel company with an online presence, and you’ve decided that developing the next generation of mobile apps will be key for your future growth. You might decide that you need to recruit engineers with critical mobile skills from larger software companies in your area plus those in several tech-hub cities, instead of just recruiting locally. Knowing which companies you’re competing with for in-demand workers helps you ensure that the salary ranges you set are optimized to attract the caliber of talent you need.

Stick to Your Comp Plan

When you’ve identified the compensation range for a position, stick with it. It can be tempting to haggle with a great candidate that is just outside of your hiring budget for a lower salary. You might have a persuasive department head who has convinced the CFO that his employees need golden handcuffs. When these deviations come up, rely on your research and make your case for appropriate compensation levels. This consistency will help stave off unfavorable salary comparisons between employees and make it clear that fair pay is part of your compensation strategy.

Focus on the Full Employee Experience

Speaking of performance, your employees deserve the chance to grow in their jobs, and not just during yearly performance reviews. Salary doesn’t increase intrinsic motivation and engagement, but a system of regular feedback and recognition can help make working for your organization an enjoyable experience, for both salaried and hourly employees.

When it comes to compensation, there’s no magic number or foolproof formula that will guarantee years of dedicated service. But when you use relative pay positioning to keep both candidates and employees focused on their experience in your organization, you set the stage for meaningful, productive, and even enjoyable work.

Tell us what you think 

Do you have additional thoughts on how you can attract and retain talented employees without spending more money? Share your thoughts and experience with us below, or Tweet us at https://twitter.com/payscale 

This piece is written by Brian Anderson, HR Copywriter with BambooHR.

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