- Companies may see subtractions after additions. Recent research found that when new hires get paid more than incumbent employees, top performers are often the first to resign.
- Job switchers, in general, are experiencing a pay bump. The median year-over-year pay increase for job switchers was 10% in March, the highest rate of growth since July 2023.
- Exits can occur if employers are slow to address pay concerns. The longer it takes to adjust the pay of tenured employees upward to approach the highest-paid new hires, the faster they resign.
Does your organization’s revolving door of hiring seem to be spinning a little faster these days?
According to new research, it may be because when new hires are paid the same or more than current high-performing workers, the resulting pay compression may push some of these incumbents toward the exits in search of their own greener pastures.
The research was conducted by people analytics technology company Visier based on its Community Data pool, comprised of more than 4 million employee records from nearly 100 companies from 2018 through 2023.
“We were particularly interested in how likely employees were to resign after the addition of a higher-paid coworker,” said Andrea Derler, Visier’s principal for research and value.
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Researchers also found high performers were disproportionately represented among resigning employees.
“In other words, hiring new employees at higher salaries than existing employees doesn’t just lead to generally higher turnover rates for current employees,” Derler said. “It increases attrition specifically among the employees who add the most value to their organizations.”
So, how can organizations add talent without also losing their high-value performers?
The Benefits of Job Switching
While your organization may be experiencing the sting of this phenomenon, this may not be a new issue at all, according to Derler.
“We may just never have looked at this before, due to a lack of data both on the organizational side and the employee side,” she said.
But now, whenever high-performing “stayers” see their new colleagues’ competitive or eye-popping salaries on Glassdoor or other sites where salary ranges are shared and compared, it may make them feel that their efforts are under-rewarded, which may reduce their motivation and increase the chance they start looking elsewhere, said Derler.
Indeed, when researchers examined data on resignations, they found every third resigner is a high performer who left their employer after a new colleague was hired at a higher salary. For all other resignation scenarios, the ratio of high performers to overall employees was one in four.
Cash Is a Critical Consideration
Meanwhile, new research from ADP found the median year-over-year pay increase for job switchers was 10% in March, the highest rate of growth since July 2023. Comparatively, job stayers saw an annual wage gain of 5.1%.
Even those workers returning to previous organizations are taking advantage of current labor-market conditions, as research on boomerang employees showed those who return to their previous employer have an average wage increase of 25%.
Leading Comp, Lagging Skills
As Visier, through its research, and others have observed, salaries of new hires have been growing faster than salaries of existing staff, thanks in large part to the Great Resignation, even though longer-tenured employees may have more experience and institutional knowledge.
As a result, when it comes to setting compensation for new hires in comparison to their colleagues, it may be advantageous to mind the midpoint of salary ranges, said Lori Wisper, managing director at WTW.
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In recent years, many employers have been forced to lure new workers with salaries “far above” the midpoint of the job’s salary range even if they may not yet possess a fully competent skill set for the new role, she said.
“So, for workers moving into new – and higher – roles, you really have to ask yourself whether they can be considered at the fully competent skill-set level when they begin,” Wisper said. “If not, then they shouldn’t be brought in above the midpoint level in the first place.”
Move Quickly to Mitigate Morale Risks
One way to mitigate exits and / or demotivation in veteran talent may be to act fast and decisively. According to the Visier research, the longer it took to adjust the pay of tenured employees upward to approach the highest-paid new hires, the faster that incumbent talent resigned.
In particular, if the pay adjustment took place within a month of the new hire entering the team, tenured employees stayed for an average of 2.5 years at the company. If it took longer than one year to adjust pay in these situations, tenured employees resigned, on average, twice as fast.
Derler said the message from the data on departing workers is clear: “There are indeed more drivers than salary to the decision a person may make as to whether or not to resign from their job. But, money matters.”
Pay Attention to the Pay-Sensitive
Derler offered the following considerations when it comes to slowing down an organization’s revolving door of talent:
- Be aware of the role salary plays for your employees, including which segments of your workforce are more and less pay-sensitive.
- Conduct regular pay equity analyses, especially for DEI purposes, but also when new hires are coming into teams.
- Equip your managers with the data, tools and education around pay that make sense in your organization.
While the Visier research did not examine the degree to which organizations had pay-transparency protocols in place, experts tend to agree they can make managers more accountable to those affected by compensation decisions.
In addition, if managers have difficulty justifying the differentiation between comp levels of new hires and veterans, they personally may have more to gain by avoiding such differentiation, said Peter Bamberger, a co-author of the Visier research.
“However, that’s only half the story,” said Bamberger, who is also head of the organizational behavior department at the Coller School of Management at Tel Aviv University. “The other half has to do with the labor market. With unemployment in North America at its lowest level in decades, it’s no wonder we are seeing pay compression raising its head.”
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