The Impact of Fair Pay Perception on Employee Retention

The Impact of Fair Pay Perception on Employee Retention

Research from Payscale reveals that employees are 50 percent more likely to leave if they believe they are paid below market, even if they aren’t. However, pay transparency decreases intent to leave.

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How fair pay impacts employee retention

Everyone wants to be paid fairly for their work. Unfortunately, how pay is determined and what constitutes fair pay is frequently a mystery to most employees. Employees tend to believe they are underpaid when they are paid at market or even when they are paid above market.

It stands to reason that when employees perceive that they are underpaid, they are more likely to seek opportunity elsewhere. Does that mean pay transparency can reduce unproductive turnover?

To find out, Payscale conducted a study analyzing the impact of pay perception, market penetration, and pay transparency on retention. We also evaluate to what degree respondents accurately perceive their pay.

Our analysis was conducted using 383,609 responses to Payscale’s online salary survey taken between May 2017 and May 2021, where respondents provided salary, job, and demographic information and responded to the following questions:

  • “How do you think your current pay compares to other employees like you? Below Average, Average, Above Average”
  • “In the next 6 months, I plan on actively seeking new jobs outside of my current company: Yes or No”
  • “How pay is determined at my company is a transparent process” – Likert scale 1-5, where 1 is strongly disagree and 5 is strongly agree.

The results of our study show that employees have no idea whether or not they are paid fairly. It also shows that perception of fair pay impacts retention more than market penetration. Finally, our research demonstrates that pay transparency reduces the likelihood that employees will seek a new job.

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Employees Don’t Know if They Are Paid Fairly

Open communication around pay is one of the most important aspects of employee engagement. Employees want to know that they are valued. However, most have no idea if they are paid fairly. According to Payscale’s analysis, 57 percent of people who are paid at market believe they are underpaid, and 42 percent of people who are paid above market believe they are underpaid.

Do People Know if They are Paid Fairly?

Payscale conducted a similar analysis in 2015 with similar results. At that time, 64 percent of people who were paid at market believed they were paid below market and 35 percent of people who were paid above market believed they were paid below market. Although a smaller percentage of people paid at market believe they are underpaid in 2021 compared to 2015, a larger percentage of people paid above market believe they are underpaid.

This indicates that employers still have a lot of work to do around pay communications and pay transparency.

But are there benefits to doing so?

Perception of Fair Pay Impacts Intent to Leave

Regardless of whether or not employees are truly paid below market, our study shows that those who think they’re paid below market represent two-thirds of job seekers. Using a logistic regression model that takes into account multiple variables that impact retention, our analysis has determined that employees who think they’re paid below market are overall 49.7 percent more likely than those who think they’re paid at or above market to seek a new job in the next six months.

Percent of People Seeking a New Job

Moreover, we found that market penetration, or how one is actually paid compared to market, does not have a statistically significant impact on retention. We evaluated a respondent’s salary by their job title and years of experience to determine if they were truly paid below, at or above market.

In the below graph, we see that both job seekers and non-job seekers have the same distribution across market penetration. If there had been a difference in how market penetration affected both groups, we might have expected a high frequency of job seekers among those who are truly paid below market and a high frequency of non-job seekers among those who are truly paid above market. However, we find that the distribution of job seekers and non-job seekers closely matches at each market position and there is no statistically significant difference between them.

Job Seeker Behavior Does Not Change With Market Penetration

It is perception of whether or not pay is fair that impacts whether an employee will stay with the company or start looking for other opportunities. Again, this emphasizes the importance of pay communications. However, according to Payscale’s Compensation Best Practices Report (CBPR), a majority of organizations (57.8 percent) do not train managers on pay communications.

Our research suggests that even basic efforts to train managers on pay communications will help organizations outcompete other employers when it comes to retention. Of course, in order for organizations to train managers on pay communications, organizations must first be confident in their salary data, compensation strategy, and pay structures, and that they are actually paying people fairly — not just saying they are.

From there, organizations are better positioned to pursue pay transparency.

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Pay Transparency Reduces Likelihood Employees Will Quit

In our research, we asked employees if pay at their organization was transparent on a spectrum of 1-5. We then evaluated the likelihood to seek a new position at each level of transparency relative to a base level of transparency.

Overall, we found that employees were more likely to leave non-transparent organizations compared to transparent organizations.

Specifically, we looked at how the likelihood to seek a new job changes as organizations become more transparent by using a base transparency level of 1. We found that employees who work for a very transparent organization (level 5) are 65 percent less likely to leave relative to a level 1 transparent organization. Alternatively, we can evaluate how intent to leave changes when organizations become less transparent by using a base transparency level of 5. Expectedly, employees who work for a very opaque organization (level 1) were 183 percent more likely to leave relative to a level 5 transparent organization.

Impact of Pay Transparency on Intent to Leave

Interestingly, a level 4 pay transparency slightly outperforms a level 5 pay transparency for intent to leave. This may be because high pay transparency could be detrimental to pay perception in some unique ways. For example, high transparency may cause some employees to feel dissatisfied when comparing their salary to what other employees are making or validate that they truly are paid below market.

Overall, though, pay transparency of level 4 or 5 outperforms a level 3 and below when it comes to intent to search for a new position.

Unfortunately, 78 percent of respondents described their organization’s transparency as a level 3 or below, meaning that the vast majority of organizations are putting retention of their workers at risk by not being fair and transparent about pay. This means that one concrete thing employers can do to increase employee retention is level up their compensation strategy and become more transparent about how they pay.

How Pay is Determined at my Company is a Transparent Process

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Methodology

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To determine impact of selected variables on retention, we employed a logistic regression model where intent to seek a new job in the next 6 months was the dependent variable. Market penetration was determined as a respondent’s reported Total Cash Compensation being above,  at , or below the national median for their job and experience level.

Definitions

Total Cash Compensation (TCC): TCC combines base annual salary or hourly wage, bonuses, profit sharing, tips, commissions, and other forms of cash earnings, as applicable. It does not include equity (stock) compensation, cash value of retirement benefits, or value of other non-cash benefits (e.g., healthcare).

Median Pay: The median pay is the national median (50th percentile) annual total cash compensation. Half the people doing the job earn more than the median, while half earn less.

Market Penetration: A respondent’s pay divided by the national median pay for their job title and years of experience combination. If a Data Engineer with 3 years of experience makes $93,400 a year and the national median for Data Engineers with 3 years of experience is $89,500, their market penetration is 1.04. Meaning they are 4 percent higher than the market median.

True Market Position: A respondent’s pay relative to the market, which is based at the national median for their job and experience level. This has 3 potential outcomes:

  • Above Market: Defined as 10% or more above the national median for a given job and experience level.
  • At Market: Defined as within +/- 10% of the national median for a given job and experience level.
  • Below Market: Defined as 10% or more below the national median for a given job and experience level.

Poor Pay Perception: Respondents that think their current pay is below average compared to other employees like them.

Transparency Level: The level a respondent reported for their employer on the pay transparency spectrum (likert 1-5).

Base Transparency Level: To fully explore the relationship of pay transparency and retention, we establish base levels of transparency relative to the other levels. A base level of 1 measures the likelihood to seek a new job at levels 2-5, relative to 1. (i.e. – Respondents at level 5 are 65% less likely than those at level 1 to seek a new job)

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How Fair Pay and Pay Transparency Combat Turnover

Our research shows that perception of being paid below market increases intent to leave, even when employees are actually paid at or above market. Organizations can take steps to measure these risk factors and also mitigate them with pay communications and increased pay transparency. Our full report also provides additional data on how organizations are experiencing turnover and what strategies they are using to retain employees.