Are You Paying Too Much For New Talent?

Published 29 November 2022 | 3 min read

Yes, and it may be burning your existing employees.

Stubborn inflation is forcing many organisations to pay more for new hires, especially given the shortage of key talent. According to a recent Gartner survey, 57% of CFOs say they’ll increase funding for compensation, which is the second-highest spend category for increases after digital technology. What’s more, 42% of survey respondents plan to increase spending to backfill vacant roles, and 35% say they will increase expenditure for hiring new roles.

But that same inflation is reducing the real income of existing employees. Although many companies are starting to offer one-time bonuses in addition to regular pay adjustments, among other tactics, employees are increasingly underpaid as inflation rises. And this could look quite different for varying regions of a global company. So what compensation strategies can you use to both attract and retain important talent?

“Inflationary pressures have worsened talent retention issues in an already hypercompetitive labor market,” says Aaron McEwan, VP, Advisory, Gartner. “Executive leaders must select a compensation strategy that mitigates talent risks while minimizing cost pressures.”

Existing employees feel the impact of inflation

While you may not want to risk making long-term salary changes when inflation could be lower in a year, employees feel the impact now. Inflation is increasing the cost of living and lowering incomes. Almost half (45%) of U.S. households report financial hardship due to recent price increases, but only 37% of organisations plan to factor inflation into their compensation budgets or decisions. And only 13% plan to increase compensation for all employees as a result of inflation.

Organisations that don’t adjust pay to fully match inflation increase the risk of turnover as employees find new job opportunities that pay more. In 3Q21, employees expected on average a 10.5% increase in total compensation when switching employers — more than enough to cover the increase in inflation.

The compensation gap is widening

As existing employees feel the inflation impact and organisations compete for talent with competitive salaries, the compensation gap widens. Going into 2023, companies are more transparent about pay. According to a recent Gartner survey, every fifth organisation shares salary ranges for roles, which makes it evident that new hires are being paid more. This may breed resentment and disengagement with existing employees. Our research finds that 35% of managers and a quarter of nonmanagers report that new hires are making the most money in their organisation, leading to internal friction. 

Employers often put unnecessary financial pressure on their organizations in order to secure new talent. While existing employees understand that there is a financial advantage to switching jobs, they don’t expect it to be that significant, and are quite intolerant of discrepancies in pay. Seventy percent of tenured employees believe that a new hire earning greater than 5% more than them is “unfair.” A decrease in engagement and intent to stay begins when the pay gap is just 3%.

10 ways to attract good talent without worsening pay inequity

Chief human resources officers (CHROs) must focus on retaining top performers and employees in mission-critical roles and prioritize staffing of these positions. Without the right people in the right roles equipped to do the job, organisations will fail to meet business objectives and could be outperformed by competitors. Explore ways to attract top talent relative to existing employees: 

1. Collaborate with the CFO to create budget-neutral ways of retaining and attracting talent. This may include sign-on and retention bonuses, spot bonuses for hourly employees, accelerated investment in employee retirement plans and repriced employee stock purchase options.
2. Place a limit on new hire packages to ensure you’re within a reasonable switching premium range.
3. Offer fully generous remote - or hybrid-work arrangements.
4. Extend leave and PTO policies to give new hires more options for time off and vacations. 
5. Differentiate yourself by promoting radical flexibility options such as work from anywhere or four-day workweeks.
6. Consider sign-on bonuses, home office stipends, share options and other one-off payments to new hires that do not contribute to widening the pay gap.  
7. Clearly articulate opportunities for career progression, professional and personal development. 
8. Build support options into packages that address capacity and workload issues.
9. Promote the organisations’ ethics and sustainability credentials. 
10. Accept candidates from unconventional backgrounds to widen the talent pool.

In short:

• As the competition for talent tightens, CFOs plan to invest in new hire compensation.
• However, due to inflation, existing employees are increasingly underpaid, and few organisations plan to fully adjust compensation in response.
• There are 10 ways you can attract good talent without overspending or worsening pay equity.

Click here to read the article by Gartner.