Time to re-evaluate the pay review

Time to re-evaluate the pay review

Everyone is aware of the basic market rules: If demand outstrips supply or if the market value increases for goods or services you purchase from external parties, the price you pay for those goods or services goes up. You almost certainly raise your own prices in similar conditions. The same market rules should also apply to paying staff which is why many companies should revise their pay review process.

Yet this is not always the case. There are still many companies that hire at market rate and then give their staff a periodic incremental increase for the rest of their career with the organisation.

Even when organisations transfer people from one position or department to another they typically base the employee’s new pay on their old pay plus a bit of a bump. And sometimes employees have to prove themselves in their new role before they are given a salary increase - even if they’ve proven themselves to be a loyal and a consistent high performer in their current role.

On the other hand companies are willing to hire new employees, with no direct experience of how they will perform in the job or within the organisation, at sometimes significantly more pay than a tried and true performer who has proven to be a good culture fit.

A pay review to keep costs down

Salary is still an important reason why many employees decide to leave the company. Employees typically know that if market conditions change or if they have been in their role for more than a few years they will need to find a new job in order to get a higher salary.

Employees leaving the company can be costly. If organisations lose people because they aren’t paying them what they are worth it costs them significantly more than simply the increase in pay between the employee who has left and the new hire. The Gallup Organization estimates that the average cost to replace someone who leaves ranges between 50 - 200% of their annual salary, and this figure jumps to up to 300% for those staff members with a high degree of intellectual property knowledge, strong customer relationships, or other unique skills or attributes.

And what of the cost of bringing someone into a team at a significantly higher amount than the rest of the team? A lot of people openly discuss salaries these days and word will get out. It is therefore not unlikely that teams completely fall apart because of a change in the group dynamic as a result of it. If this happens companies could be faced with additional departures or productivity may take a hit.

A pay review because staff are a company’s biggest asset

As the demand for quality candidates outstrips supply or as skills become more and more specialised, the market rates for the labour companies need go up. Many companies should therefore revise their salary review process and reward loyalty, high performance and hard work with a small incremental increase on an annual basis.

People are a company’s most valuable asset, so it’s important to recognise and reward appropriately. A pay review provides exactly that opportunity.

Companies should therefore benchmark their employees’ pay against market rates and increase accordingly. Yes, it will cost the organisation money - in the short run. But more than likely it will add significantly to the bottom line in the long run. Studies show that more tenured and better performing employees add to the bottom line through increased quality, customer service and decreased absenteeism and turnover. Additionally, word will get out about how companies treat and reward their staff - making recruitment much easier and less costly. And a manager’s job will be much less stressful as well.

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