Employee Retention: Why Pay Alone Fails to Keep Talent

More than 64% of HR professionals report their organization has experienced increased turnover in the last year. Triggered by rising inflation, new legislation mandating pay transparency, and a competitive labor market, compensation's role in attracting and retaining key talent is getting new scrutinyfrom people leaders, employees, and the Human Resources community alike.

Research from Perceptyx — including data from more than 700 HR leaders and 2K+ U.S. employees — sought to understand the tactics organizations are using now to combat challenges in compensation planning, talent attraction, and retention, along with the impact those tactics are having on personal employee decisions to stay or leave their current role.

Here are some of the highlights of our special report, "Still Can’t Buy Me Love (Or Loyalty!): The New Role of Compensation for Employee Retention & Attraction."

Key findings at a glance

• 64% of Human Resources professionals say that two key strategies they are using this year for retention of employees are company-wide salary increases and retention bonuses.

• 40% of employees who have taken a job at a new organization in the last 6 months are earning the same or less than in their prior role.

• 2x more employees would point to future career development versus compensation when citing the reason for leaving their previous job.

• A recent pay raise has zero impact on a person’s intention to stay with the organization.

• Employees are 8x as likely to regret leaving a prior organization if they had a great relationship with their manager.

Why is everyone talking about compensation?

Organizations are talking about compensation because the cost of getting it wrong has never been higher. Real inflation continues to rise, and workers who haven’t received a pay increase can purchase even fewer goods and services than they could a year ago. Even son, a competitive salary is merely table stakes for organizations seeking to attract talent, especially during a labor shortage. Talking to potential new hires about about pay increases, stock options, or other financial incentives sends a powerful, empathetic message to potential candidates. But it isn’t enough to simply bring talent in the door.

Getting compensation strategy right is now a legal and competitive requirement, as more states enact pay transparency laws and remote work expands the talent pool globally. More states are enacting pay transparency and equity laws, the power of social media has democratized the compensation conversation in new ways, and a rise in remote and hybrid work has raised new questions about how to determine appropriate compensation for employees.

For years, conventional wisdom dictated that while compensation is clearly a factor in attracting and retaining talent, it’s not the most important factor. Instead, much of the variability in employee perceptions about their pay could be explained by other forces, namely an employee’s connection to the workplace, and more specifically, the relationship with their manager. As these new issues, the current inflationary environment, and the rise in employee churn bring the gravity of compensation back to the forefront, organizations are asking themselves if that conventional thinking still holds true or if the path to employee loyalty is through the pocketbook.

How much turnover are organizations actually seeing?

More than 64% of HR professionals report their organization experienced higher turnover in the past year. Similarly, a significant number of employees report that they are in the market for a new opportunity. Nearly 40% of the more than 2,000 US employees in Perceptyx’s panel survey say that they have applied for a new role, either within or outside of their organizations, in the past year.The financial stakes are considerable: the total cost of replacing an employee, including recruiting, onboarding, lost productivity, and reduced morale, can far exceed that employee's annual salary.

When asked to prioritize key talent management issues, human resources leaders ranked them clearly:

• Stopping attrition of the broader employee base was the most important task, with 3 in 5 ranking it first.

• Backfilling open roles was a clear second priority.

• Attracting talent for net-new roles was the lowest current priority, with nearly half selecting it last.

What do job seekers actually want from a new employer?

When Perceptyx asked what makes a company most attractive to job seekers, compensation and benefits top the list for the U.S. That is often the first thing people want to know and the first thing that gets an organization noticed by a potential candidate.

However, when it comes time to actually choose a new employer, things change for those job seekers. When workers who accepted new jobs explained their decisions, future career growth was 2x as likely as compensation or benefits to drive the actual job change. This aligns with broader workforce research showing that employees who stay and grow within an organization build institutional knowledge that makes the entire business more effective.

The Human Resources leaders Perceptyx surveyed acknowledge that salary is only one reason an employee chooses to accept an offer, and a similar percentage (38%) acknowledge that most former staff didn’t leave for higher pay. They are also 35% more likely to say that candidates chose them for their excellent culture or well-known brand than for their salary package.

Yet, when asked what strategies they are using to attract new talent, most organizations are tempting employees with starting salaries that are higher than they have traditionally paid, coupled with hiring bonuses.

The data puts HR leaders in a difficult position: what initially motivates a candidate to apply (an eye-catching salary) isn't the same thing that motivates them to ultimately accept a job offer (such as the potential for career growth). This is especially challenging for organizations that aim to pay below the market, believing that their employee value proposition (EVP) goes much deeper than pay alone. But organizations that effectively communicate the totality of their benefits offering, both financial and non-financial, will attract the right employees: the ones they can retain for the long-term.

Why do employees choose to leave their organizations?

Employees choose to leave organizations for many reasons, but clear patterns exist. When recent job-changers were asked about the top reasons for leaving their immediate last job, the top selection was an opportunity to grow or develop in their career, followed by health benefits. Compensation was way down the list, with less than half as many mentions as career growth. Further highlighting this fact is that more than 40% of those who have recently accepted a job at a new organization say they make about the same or less in their new role.

For employees who feel fairly compensated for their contributions, compensation as a reason for leaving dropped even further, to one-third the number of mentions as career growth. This highlights a goal for organizations: provide fair compensation, not just more compensation.

More than 70% of employees believe that their salary is fair, both compared to the market and for the skills and knowledge they bring to the table. This figure was the same for recent job leavers who were asked to rate their prior organization. The data confirms that compensation alone is not driving turnover decisions.

The data shows that it would be naive for organizations to attempt to explain employee attrition with one factor alone, including salary. Overwork, poor management, misaligned culture, and a lack of growth opportunities all contribute to an employee's decision to leave. Human Resources executives must look holistically at the organization's total employee value proposition, making a case for why someone should choose to continue a career with them instead of the organization down the block, or in the new remote-friendly environment located halfway around the world.Tools like exit surveys and continuous listening programs can help identify which of these drivers are most active within a given workforce.

3 ways to stay competitive on compensation and retention

Even with the increased competition for talent and the record-high inflation, throwing money at the problem isn’t enough to compensate for a bad, or even a mediocre, workplace.

Employers wishing to remain competitive in any labor market must do three key things:

• Provide competitive rewards and communicate them effectively. In any market, the best talent will shop around. For example, in the United States, many employees prioritize excellent health insurance even above their cash compensation. Additional perks such as wellness apps or gym memberships aren’t prioritized, but they do have real monetary value and that value should be made clear to employees.Regular employee listening can reveal whether your workforce understands and values the full rewards package you offer.

• Manage people well. Great people management keeps employees at their company longer, makes them more loyal to their company, and increases the likelihood they will recommend their company to others as places to work or do business. Employees are nearly twice as likely (1.7x) to indicate a strong intention to remain with an organization when management is excellent, and actual attrition behavior mimics that finding. What may be news is the high number of people who left for greener pastures only to realize that their prior workplace was stronger than they expected, making them excellent boomerang candidates.

• Create a career path. As described in our report, The New Factors Driving Employee Experience Now, employees need to have a clear sense of the company’s direction, an indication of specific ways they personally contribute to that direction, and the management support to get there. Future career growth was the number one attractor for new joiners, with nearly half placing it in the top three reasons they selected their new role.

Frequently asked questions

What is employee retention?

Employee retention is an organization's ability to keep its employees over a set period of time. It's typically expressed as a percentage. A retention rate of 85%, for example, means the organization kept 85% of its staff during that period. High retention lowers recruiting and training costs, preserves institutional knowledge, and keeps teams productive.

What is considered a good employee retention rate?

Most HR benchmarks set 90% or higher as a strong retention rate, though this varies by industry, company size, and role type. Rates below 80% usually point to a problem worth investigating. Tracking your rate over time and comparing it to your industry average gives a more useful read than any single number. High-turnover industries like retail and food service operate with lower baselines, while professional services and technology firms tend to run higher.

Why do employees leave their jobs?

Career growth is the leading reason employees change jobs, according to Perceptyx research. It's cited twice as often as compensation among recent job-changers. Health benefits rank second. When employees feel fairly paid, pay-related departures drop to about one-third the rate of career-related ones. Over 40% of people who recently accepted new jobs now earn the same or less than they did before, which shows that a bigger paycheck rarely drives the final decision to leave.

Does raising pay improve employee retention?

Pay increases attract candidates, but Perceptyx research found that a recent pay raise has no measurable effect on an employee's intention to stay. Employees are nearly twice as likely to remain with an organization when they have strong management, and eight times more likely to regret leaving if they had a good relationship with their manager. Fair compensation matters (more than 70% of employees rate their pay as fair), but raising salaries without addressing career growth and management quality rarely stops attrition on its own.

How Perceptyx helps you act on attraction and retention data

Organizations concerned about the attraction and retention of talent have work ahead of them in compensation, organizational culture, and career development. Retention is shaped at every stage of the employee lifecycle, from a candidate's first impression through ongoing performance feedback and growth opportunities. A continuous listening program can help answer challenging questions about all three by drilling into survey data to discover what your employees need to do their best work, and how these needs are evolving over time. With AI-powered analytics and manager effectiveness tools, Perceptyx helps organizations activate their people across every driver of retention.