When employees see little room for pay growth, talent retention suffers. But by refocusing pay progression, employers can maximise investment and keep key people engaged, says Holly Coe, senior reward consultant at Innecto.
Employees leave organisations for many reasons but pay is consistently near the top of the list. Put simply, when employees feel their prospects of pay progression are low, it impacts retention.
There are key challenges and enablers in pay progression, which can be measured using employee lifetime value. If companies rethink their pay progression strategy taking these into account they can achieve a better return on their investment and provide a healthy boost for workers.
Common challenges
Every business and HR manager would like to be able to accelerate pay for strong contributors but competing priorities and limited financial resources make this difficult. Most of the pay review budget goes towards ensuring we keep up with the competition, particularly when the market for key roles is moving fast. Typically, companies suffer from a lack of three things:
Budget – we often see clients with performance frameworks in place and the intention to accelerate pay for strong performers, but only 0.5 percent to differentiate good from the best, which cannot support movement in a pay range.
Framework – not having a robust pay framework prevents assessments and undermines managers’ ability to apply decisions fairly or consistently.
Modelling – organisations also struggle to implement pay progression if they lack the resource or ability to model the impact of change.
Over half of the organisations surveyed for our recent pay trends event admitted to having no pay progression mechanism in place at all. As HR professionals, we can create pay ranges but, without a framework of reference to look at, employees may not understand how the ranges are being used or how to progress their pay within them.
To reach a more nuanced and blended approach to pay progression, retaining an element of market alignment while still recognising performance or competence, I would recommend taking a step back and asking the kinds of questions that force a strategic rethink of your core pay principles, such as:
- What do we want to incentivise and reward?
- How is pay being progressed within our organisation and can individuals impact it?
- Is there a performance element with regular reviews?
- How are we determining an individual’s ongoing value? (performance, contribution, length of service)
- How much do we want to involve line managers and how capable are they to assist?
- Do we need internal resource to drive change or should we bring in external support?
- How can we best communicate our chosen approach throughout the business?
- How do new employees know what their career path is when they start?
Maximise your employee lifecycle value
With the estimated cost of replacing an employee between £14,000 and £50,000 depending on the sector and level of seniority, it is worth doing all we can to hold on to the people we invest in. It is also worth trying to maximise the time they spend paying us back at the fullest level. This is a win-win: great for the organisation in terms of productivity and positive too for the employee in terms of career arc.
Consider an employee’s time in a company as a race: there are periods near the start line and the finishing stretch when they cost the business money and hopefully a longer portion of time down the back straight when they are running flat out and generating a strong return.
Starting blocks – at the beginning of the race lifecycle, during recruitment and onboarding, an employee’s output is negative as they consume resources in training and getting up to speed, not yet contributing.
Up to speed – when they are competent in their role, they can fully contribute and add value to the business.
Running out of steam – When they decide to leave the business productivity starts to decline until they reach the finish line on their last day and output diminishes to zero.
One of our not-for-profit clients identified that their fundraisers were most valuable after two years, when they know their role and have developed key relationships, but they were often leaving before that for better-paid jobs that also demonstrated stronger pay progression. By addressing that and extending their average fundraiser lifetime value by just one year, they increased return on investment on their spend and grew revenues.
So, what steps can we take to extend and maximise an employee’s Lifetime value?
- Get employees up to speed quicker by streamlining recruitment and onboarding.
- Increase how high they can go in the organisation.
- Keep them at that level for longer, ideally extending their total stay.
- Keep them motivated even once they have decided to leave.
If we can achieve some or all these measures, we can generate a better ROI in our people and improve the overall employee experience.
When our workers have a clear understanding of what they need to do to advance their salaries and grow their careers, it boosts retention and lifetime value by encouraging a culture of trust and fairness and hikes productivity by motivating them to be loyal and go the extra mile.
