What’s the True Worth of Talent? (i4cp login required)

Would you give your best talent a 13% pay raise?

Maybe you aren’t quite sure how to answer that question.

Your first instinct could be that it all depends on the
context and circumstance—13% is well above salary inflation, which consistently
comes in at around 3%. But we’re talking about your best talent, not your
average good-performing employees.

Some of you might say, “Well, if we do that, then we won’t
be able to afford salary increases for some people—and that’s not fair. And
what is magic about 13% anyway?”

Magic? No, however, publicly
available research indicates that a talented person will leave your company for
another employer for as little as a 13% salary increase. And Forbes
famously estimated
that the average boost in pay received by workers who
leave a company for a new position is 10% to 20%.

So, is it possible you could neutralize that potential talent
defection with a 10% to 15% salary increase? We have our own thoughts, but
first we decided to ask compensation experts at some of America’s best
companies.

The Institute for Corporate Productivity (i4cp) surveyed HR
leaders at over 100 companies with whom they have a membership relationship.
These leaders were asked three simple questions:

  1. Does your company have a talent review process designed
    to identify your best-performing employees?
  2. Is your company open to creating salary
    differentiation across the spectrum of employee job performance?
  3. What is the likelihood your company would
    consider investing in your best-performing employees with a salary increase in
    the range of 10-15%?

Going into the survey, we figured that if a company could
identify their best employees, and they were open to salary differentiation aligned
with high performance, then certainly the majority of these companies would be
likely to invest in their top people with a 10-15% salary increase.

Did we foretell that correctly? Well, the answer is “Yes”
and “No.”

Yes, 92% of HR leaders responded positively that a talent
review process of identifying best employees does exist in their organizations.
Whether the process is informal and decentralized by business, or it exists as
an enterprise-wide business process, we find this result predictable and
encouraging.

And yes, a large majority of respondents (87%) reported a
practice of salary differentiation across the spectrum of employee job
performance.

However, only 40% of HR leaders surveyed said that were “very”
or “somewhat likely” to give their best employees salary increases of 10-15%.
This particular result gives me pause. What factors are in play at companies
today that would prevent employers from taking this step to reward (and retain)
their best people?

The Cost of Living Factor: Some in our survey may perceive that
it’s not fair to give 0% to some employees, and 15% to others—when everyone is
impacted by the rising cost of living. The political voices today decry
decisions that favor one population over another. However, if your business
believes in a meritocracy where all employees know they have equal opportunity
for recognition and rewards, earning salary increases at the top of the curve
should be a common experience for your best people.

The Fear Factor: Some might be concerned they would
be playing favorites, or have concerns about the validity of the talent review
process. Some might be concerned about exacerbating pay inequities. Others
might be wary of seeking approval from Finance and other senior leaders.

A 2019
i4cp study on talent pools
found that 31% of survey respondents reported that
their organizations were “unwilling or unable to pay at the same levels as
their competitors” and they viewed this as a serious barrier to attracting
talent. Depending on the organization, these could be legitimate obstacles to
overcome. However, are these reasons you can live with when it means losing
talent you have identified as your best?

The Reaction Factor: It could be argued that not each
and every one of the most talented people in your organization needs a 10% to 15%
salary increase to remain loyal to your company. And if true, giving everyone
such an aggressive salary increase seems like an unnecessary expense. When it
comes to making compensation decisions, some employers choose to be proactive.
They have a clear idea of which roles in the company drive the greatest value,
they regard those roles with as having the highest priority and they reward the
top performing people in those roles with the intent of keeping them in the
company for the long-term.

Other employers prefer to be reactive and attend to the
compensation concerns of top talent when those persons give indication of job
dissatisfaction or intent to leave.

The Affordability Factor: In my experience, the
perceived issue of affordability will most often get in the way of investing in
top talent. Let’s begin with the presumption your business can afford a 3%
salary increase budget across your salaried population of 1,000 employees. Here
is a typical distribution of salary increases within the 3% budget: 

Now, let’s engage in a quick thought experiment and look at
this differently. What if you stabilized the bottom half of your performance
distribution with little to no salary increase, and shifted the majority of
your increase budget to the top half of your performance distribution?
Something like this example, where your top 20% of contributors will get an
average salary increase of 10%—on a 3% budget. 

Some managers and leaders may struggle with the mere idea of
a 10% to 15% salary increase, even for your best talent. However, if you lose
that talented person to another employer willing to pay a higher salary, your
company will end up spending that much or more to replace that person.

Some entities
(
such as SHRM) predict that
every time a business replaces a salaried employee, it costs six
to nine months’ salary on average. For a manager making $80,000 a year, that’s
$40,000 to $60,000 in recruiting and training expenses. And that doesn’t even
begin to measure the loss of intellectual capital from seeing one of your best
employees walk out the door for a little bit more money elsewhere.

So, there really isn’t a question about
whether your company will or won’t incur the employment cost. It’s about how
you choose to spend it—wisely.  

Mark Englizian is senior strategy advisor for the
Institute for Corporate Productivity (i4cp) and Chair of
i4cp’s Total
Rewards Leader Board
. He is the former CHRO of the Walgreen Company
and has also held senior HR roles at Amazon and Microsoft. He currently advises
Boards of Directors, CEOs and CHROs worldwide on human capital matters.

Productivity

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