Compensation structures are not something you set and forget, said Tina Marie Wohlfield, SHRM-SCP, founder and chief people strategist at HR consultancy TIMAWO LLC in Fraser, Mich., near Detroit.
Wohlfield offered tips to keep pay strategies up-to-date on June 14 at the SHRM Annual Conference & Expo 2022 in New Orleans, in her concurrent session "When Pay Strategies Fail—Why HR Needs to Act Now."
Avoiding Ad Hoc, Reactive Practices
When pay ranges haven't kept up with job market rates, "employees leave because they are offered life-changing money by another organization," Wohlfield said. The problem worsens when employers rely on ad hoc approaches to setting employees' pay.
Managers or executives "shouldn't just say, 'I met this guy on the golf course, let's give him X dollars,' " yet they often do, she noted.
When job categories haven't been synced with market-based pay rates for years, "you can't blame rising turnover solely on pay inflation," she said.
Keep in mind, Wohlfield advised, that:
- Just being reactive to pay issues gets HR into trouble.
- Pay systems will break down without preventive maintenance.
- Don't let the finance department dictate pay budgets without HR's input. Make friends and work with finance.
"Counteroffers are reactionary and often too late," Wohlfield noted. But if made, they should be based on market data, with competitive pay rates.
Penalizing Loyal Employees
Pay compression is a common result of an ad hoc approach to pay and out-of-date salary ranges, Wohlfield said. Long-tenured employees earning less than new hires in the same position are paying a "loyalty tax," she noted, a term used by organizational psychologist Adam Grant.
"When a new hire makes $8,000 to $10,000 more than long-tenured workers, existing workers will learn about it because employees talk, and then they leave—or they stay and are unhappy," she said. "We need to stop penalizing employees loyal to us."
HR compensation managers need to "show company leaders that the 'check engine' light is on and flashing red," using data on market-based pay rates and turnover, Wohlfield said. "Employees know what they're worth and are demanding it."
Signs that compensation maintenance is needed, she said, include:
- Increasing turnover.
- Exit interview data, such as an employee telling you they are leaving to make $5 more per hour.
- Struggles to find candidates for vacancies, including offers being extended and declined.
- Competitors poaching talent.
In this situation, employers need to put in place a preventive maintenance plan, reviewing current salaries to identify which positions aren't keeping up with competitive rates.
Wohlfield also favors sharing pay ranges in job descriptions. "Many states require it, and it's a good practice—why waste your time and a job candidate's time if the money isn't appropriate?"
Preparing 2023 Pay Budgets
Now is the time to prepare to have 2023 pay budgets sufficiently funded to address these issues, Wohlfield said, leaving a cushion of funds to fix unanticipated future developments—such as a spike of 8 percent or more in what the market is paying for a position that's highly valued by your organization.
HR's job is to "convince leadership to provide the funds" because a major loss of key talent, and the intellectual capital they hold, can be devasting to an organization.
Consider midyear pay increases but not across the board, she suggested, instead focusing on critical talent whose pay has fallen out of sync with the market.
"Turnover is high enough," Wohlfield said.
Related SHRM Articles:
Creating a Motivational Cash Compensation Program, SHRM Online, June 2022
U.S. Inflation Rate Reaches 8.6% in May, a 40-Year High, Pushing Wages Up, SHRM Online, June 2022
High Inflation Means Resetting Pay Strategies, All Things Work, June 2022