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The Disconnect Between Loyalty and Competitive Pay

With an unemployment rate less 3%, and a highly mobile workforce, organizations in the United States must continually evolve and build on means to both attract and retain talent. Attracting talent has a defined life-cycle that is fulfilled when a candidate starts on their first day, but retaining employees is an ongoing process that requires compelling financial and non-financial incentives to continually retain and engage employees. While the non-financial metrics are important, this article looks specifically at wage growth, compared to market growth though an employee's life-cycle and career trajectory.

A Look At An Employee’s Wage Growth Compared to Market Growth

The graph, below, is an illustration of how an employee's salary growth compares to market growth by using the following assumptions, which are based on the World at Work salary salary planning surveys, and an analysis of year-over-year salary survey wage growth. Using these assumptions, we can create a model that predicts both the employee's wage growth throughout a 15-year career, as well as the market growth.

This model quickly reveals how a long-tenured employee will never catch the market, using typical merit and promotional increases.

Assumptions Used:

2.5% annual market growth (based on conservative market increase studies)

Market value of next roles is approximately 20% more than the preceding role (based on an analysis of salary surveys and the aggregate market value increases within job families)

3.0% annual merit increases in non-promotional years (based on the World at Work salary budget survey)

10% promotional increases at years 3, 5, 8, 12 and 15 (based on "typical years of experience" found in various leveling guides)

The blue columns represent the market value of the role utilizing a 2.5% annual market growth. and the corresponding increase . The market values increase during the typical promotional years (3-years, 5-years, 8-years, 12-years and 15-years) based on the suggested years of experience many salary survey leveling guides provide. The increases are based on the overall average market value difference between jobs in the same family, but in different levels.

The inability for an employee to “catch” the market through standard merit increases and promotional increases is evident. Although the employee begins their career at just 10% below the market, over the course of 15 years, the delta between the market and the salary continually grows, and the employee can never catch up, due to the fact that the merit increases do not exceed the growth of the market.

How Compensation Plans can Prevent the Gap Between Salaries and the Market
Plan for High Performers

Not all

Invest in Employees Rather Than Taking a Chance on Them: Promotional caps may be an effective method to managing wage growth, they limit the ability to compensate an employee fairly and can create disparity between pay and the market, which may ultimately create retention challenges in either the short-term or long-term.

Ensure Your Merit Guidelines Substantially Reward High Performers: Most merit budgets in the US have hovered around 3.0% for the past several years, which is similar to the overall market movement, as a whole. The similarity in merit budgets and market movement limits most employees from improving their salary position in relation to the market. Ensuring your pay for performance program is effective in differentiating salary increases for high-performers will improve the likelihood of retaining your high performers.

• Plan for the expected length of time employees remain in jobs and job levels

• In addition to ensuring that your compensation practices developing attainable and realistic career paths for employees is extremely important

Utilize market adjustments used to recognize employees that are behind the market rate

Market adjustments are meant to

Elevate the floor of the salary range for entry level roles, or plan substantial salary increases as employees move into new levels. As Jim Brennan stated in his Compensation Cafe article “Solving the Dilemma of Pay Progression Over Time”, “if you do not properly lead your moving target, you will never hit it.”

Methodology: This study evaluated the average difference of the market median for jobs in a national Technology survey, with more than 1000 participants, by aggregating the difference between job levels, and compares that growth against assumed presumed future market growth. This information is compared against the presumed salary growth for an individual, over the course of 15 years, receiving 3.0% salary increases and 10% promotional increases at intervals consistent with the prescribed experience required from the X salary survey leveling guide. 

The difference between each level of job within the same job family was calculated by comparing the market median difference between job levels for all job families in the survey. These differences were aggregated across all jobs within the salary survey, excluding roll-up jobs to determine the average difference between job levels. Job families that did not have a complete data set (job levels 1-6) were excluded from this analysis. The future market value of jobs is based on an estimated market growth rate of 2.5% per year. 

Annual salary increases presumed a rate of 3.0% in non-promotional years whereas promotional years utilized salary increases of 10%. These amounts were selected based on historical results from salary budget surveys as well as promotional surveys from World at Work. [citation needed]. Promotional frequencies are based on the intervals described in the X salary survey leveling guide. 

Using these variables, listed above, it is evident that there is a disconnect between the market value of between different levels, the salary increase guidelines, and promotional guidelines.