In Comp We Trust? How Pay Impacts Employee Retention and Attraction

Compensation is now top of mind for people leaders, rank and file employees, and the Human Resources community alike. Triggered by unprecedented turnover, rising inflation, new legislation mandating pay transparency, and more, the role of compensation — for both attracting and retaining key talent — is getting new scrutiny.

New 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 2022 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?

While the latest numbers from the Bureau of Labor Statistics show that inflation may be slowing, workers who haven’t received a pay increase in 2022 — and many who have — can purchase fewer goods and services than they could a year ago. A competitive salary is merely table stakes for organizations seeking to attract talent, especially during a labor shortage. News about widespread 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.

While compensation strategy has always been important to organizations, perhaps now more than ever it’s something that Human Resources must get right. 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.

Churn, Baby, Churn

It should come as no surprise that more than 64% of HR professionals say their organization has experienced more turnover in the last 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 recent panel survey say that they have applied for a new role, either within or outside of their organizations, in the past year.

When asked to prioritize key talent management issues, human resources leaders said their most important task is stopping attrition of the broader employee base with 3 in 5 ranking it first. Backfilling those roles is a clear second. Of least concern was the attraction of talent for net-new roles, with nearly half selecting this as the lowest current priority.

The Laws of Attraction

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. Although career development ranked much lower than compensation and benefits in initial attraction, when workers who actually accepted new jobs were asked why, the results were surprising. Future career growth is 2x as likely to cause a job change than compensation or benefits.

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.

As the data shows, HR leaders are in a tough spot if 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 difficult for organizations that aim to pay below the market, believing that their employee value proposition (EVP) goes much deeper than pay alone. But those who do it well, and can effectively communicate the totality of their benefits offering for employees – financial and otherwise – will be bringing in the right employees: the ones they can retain for the long-term.

The Truth About Employee Attrition

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 — to 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 — underscoring that compensation alone isn’t 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. Instead, 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.

Taking Action on Compensation: 3 Key Things to Remain Competitive

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 this — or 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.

• 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 they had it pretty good where they were before — making them excellent boomerang candidates.

• Create a career path. As described in our Fall 2021 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.

Perceptyx Helps You See More So That You Can Do More About Attraction and Retention

Organizations concerned about the attraction and retention of talent have work ahead of them in compensation, organizational culture, and career development. 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.

To read our full report, click here to download it. For more information on how your organization can utilize our technology and consulting expertise, schedule a meeting with a member of our team.