New Hires vs. Incumbents: How Do Pay Disparities Impact Retention?

How does new-hire compensation stack up to pay for incumbent staffers? And, what does the answer to that question mean for employee retention? New research from compensation data company Payscale explored the subject.

In its Flight Risk Report, released Tuesday, June 16, Payscale identified:

• Jobs where the biggest pay gaps exist between new hires and tenured employees; and,
• Roles where new-hire-to-tenured-worker pay differences corresponded with an increased likelihood to leave the organization.

Where Market or Tenure Is Rewarded

While workers have traditionally benefited (i.e., greater compensation) by remaining with an organization vs. switching jobs, the dynamic is shifting in certain circumstances, roles and industry sectors.

Merits for the Market

According to the Payscale report, new hires were receiving a pay premium over incumbents when it came to “market advantage” jobs, which were defined as those that require strategic judgment, critical thinking and creative leadership. The phenomenon is prevalent for certain white-collar and/or emerging-skill roles that are rapidly being reshaped by artificial intelligence (AI).

Marketing operations, project management, compliance, quality control and risk analysis were among the top 10 roles with the greatest new-hire market advantage. According to the report, while these positions’ average year-over-year wage growth is 3.5%, top positions can command up to 12% more for new hires compared to tenured employees.

Overall, the report showed that for “market advantage” roles, new hires currently earn, on average, 3.6% more than tenured employees.

“In many of these roles, required skills are evolving faster than traditional compensation structures, and annual pay increases [are not keeping pace], creating pressure for employers to pay a premium for external talent, which can be tempting to employees eyeing opportunities,” the report stated. “AI is also reshaping many of these positions. ... While AI can automate portions of reporting, coordination and research, demand is increasing for employees who can use AI to guide strategy, interpret insights, manage risk and apply human judgment across complex business decisions.”

HR pros may better support these roles by:

• Continuously benchmarking these jobs to ensure pay remains competitive for emerging skill sets.
• Reviewing pay structures for roles impacted by AI and digital transformation, where external market demands may outpace internal increases.
• Recreating job descriptions and building clearer career progression with skill-based pay strategies to retain employees before market gaps create flight risk.

Advantages for Tenure

Conversely, employees in “tenure advantage” roles (where institutional knowledge, deep expertise and/or customer relationships is at a premium) earn, on average, 6.1% more than their newer coworkers. Many healthcare and education positions exhibit this tenure advantage.

“Because these roles depend heavily on hands-on experience and contextual decision-making, artificial intelligence is less of a threat — more likely to support the work than replace it,” the report stated. “In jobs like nursing, lab work, respiratory therapy and counseling, AI can improve efficiency and administrative workflows, but it does not substitute for clinical judgment or patient interaction. As a result, the longer employees stay in these roles, the more valuable their experience becomes in real-world situations that do not follow predictable scripts.”

HR pros may better support these roles by:

• Regularly benchmarking the jobs against the market for experienced talent to ensure related pay keeps pace with specialization and market demand.
• Updating job architectures and career paths to reflect evolving responsibilities, certifications or competitive skills, including AI usage.
• Utilizing targeted pay increases and skills-based pay differentials to reward tenure and expertise.

Workers Are More Aware of Their Market Value

Despite the temptation for higher pay elsewhere, the report noted the current workforce largely leans toward “job hugging,” which is a tendency for employees to remain in their current positions due to perceived economic uncertainty.

Even so, expanding pay transparency requirements mean employees are paying much closer attention to (and understanding) their market value. When workers see external candidates commanding higher salaries for the same or similar responsibilities, the research showed it increases their likelihood to leave. As a result, employers face mounting pressure to engage and retain talent in roles where external pay growth outstrips internal salary adjustments.

The bottom line is that organizations that fail to monitor both sides of the equation risk overpaying on talent acquisition while underpaying on retention, or vice versa. Therefore, it is likely wise to:

• Use internal metrics and people analytics (exits, employee satisfaction scores, etc.) to spot the early warning signs of attrition; and,
• Align internal pay adjustments with external market rates.

“Pay gaps between new hires and tenured employees are one of the clearest signals of retention risk. When the open market consistently pays more than internal salaries for a given role, employees notice, especially in a world with growing pay transparency,” Payscale chief compensation strategic Ruth Thomas said. “Employers who can identify these gaps can take proactive steps to close them before attrition becomes a talent crisis.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Finance and Budgeting
• People Analytics
• Workforce Engagement