How to structure equitable compensation between new hires and existing employees
In this competitive job market, companies will pay a premium for certain skillsets. But when employees discover that a new hire’s starting pay trumps their tenured salaries, that can become an issue for managers, as when employees start sharing numbers and stop feeling fairly compensated, the company suffers.
“Unbalanced salaries keep compensation managers up at night because of these employee relations issues they create,” says Preston Handler, associate partner of broad-based compensation for Aon Hewitt. “Perceived pay inequities can lower morale, render employees disengaged and less productive, and even increase turnover.”
Employees expect CEOs to make much more than managers, who make much more than receptionists; these salary differences aren’t unbalanced because they’re relative to each position’s responsibilities. But when employees compare themselves and their salaries to peers in similar positions, the compensation scales quickly skew out of balance.
“To discuss unbalanced salaries, we first need to understand what we mean by balanced salaries,” Handler says. “Balanced salaries are not the same thing as equal salaries. Balanced salaries are equitable, meaning there’s an appropriate relationship based on reasonable criteria.”
Understanding which criteria determine the pay structure for a particular position is key to balancing perceived disparities. Although unbalanced pay seems more prominent in industries where specialized skills can hike up salaries, it can happen in any organization when internal pay rates fall out of sync with the external job market.
Say, for example, that Sally joined the company three years ago, when starting pay was $20,000, but now the job market has shifted starting pay for that position up to $22,000. If Sally’s incremental raises haven’t kept pace, she’ll feel duped when Joe joins her team at a higher salary with less experience.
“That unbalanced salary comes into play because you’re chasing a limited amount of talent,” says Brittany Cullison, Senior HR Advisor for G&A Partners, a full-service human resource outsourcing firm in Houston. “Then you get into situations where starting compensation is higher than it was a few years back, and you’re trying to play catch-up.”
New hires may also demand higher salaries because they have more up-to-date skills. The more specialized or strategically important these skills are to an organization, the more it will pay for new talent. In addition, it is simply more expensive to hire new employees than to retain staff.
“The most frequently cited reason managers give for bringing a new hire in at a higher salary is that they have to,” Handler says. “The fully qualified candidate looking to switch employers typically seeks a 15 to 20 percent increase for the same work. This salary will be higher than those onboard who have seen miniscule increases in the last several years.”
Fall back on a plan
Regardless of the reasons supporting a new hire’s salary, existing employees may perceive an imbalance when they look at relative performance, and it’s that perception that managers must battle. The problem, however, is that perception is innately biased. So it’s imperative for companies to document and communicate compensation plans before salary comparisons become an issue.
“You want to be able to justify why compensation decisions are made, in the event they’re challenged or argued as unfair,” Cullison says. “Because my perception of my performance is going to be different than your perception of my performance, it’s best to implement development plans linking goals to performance to pay, so that employees know what they’re working toward, what they’re measured against and where their compensation is rooted.”
A compensation plan should define pay ranges for various positions, based on skills, experience and education at the time of hire, as well as performance milestones over time. Nailing down solid numbers isn’t easy with so many factors at play. What’s important is that the company develops a balanced system to determine hiring rates and pay ranges, reflecting both internal and external factors.
The better that managers understand the compensation plan, the better prepared they’ll be when an employee demands a raise to settle a perceived imbalance.
“I encourage my clients to share compensation-related information with supervisors regularly, like how pay ranges are developed, how they’re maintained and what tools are available to make good pay decisions,” says Katie M. Busch, owner of HR Compensation Consultants LLC, a full-service HR consulting firm in Boynton Beach, Fla. “When employees ask questions about pay and managers don’t know, the answers just heighten their frustration and perception that the company must be hiding something. The more you build that elevator speech about compensation into processes, the higher level of comfort supervisors and managers have to pass that on to employees.”
By the time an employee storms into a manager’s office — angry about a rumor about the new hire’s salary, or generic pay rates gleaned from the Internet — it’s too late to introduce a compensation strategy. Communicating plans regularly throughout an organization can pre-empt predicaments.
“If someone comes to you and says, ‘I don’t feel like I’m being paid fairly,’ it’s much easier to fall back on a comp plan, versus not having a structure and trying to explain why there’s variance between employees,” Cullison says. “Usually, having those discussions upfront will avoid the uncomfortable situation.”
Balanced pay differences
So is it worth paying a premium for new talent, only to risk upsetting loyal staff members who suddenly feel underpaid by comparison? Or should companies hire low and risk losing new candidates?
“It’s usually easier to hold on to an existing employee who’s not pleased with the new person’s pay than it is to bring the new hire onboard with a lower pay package,” Handler says. “But hiring managers should always attempt to keep a new hire’s salary in line with existing employees’ salaries.”
Balance may require offsetting a lower starting salary with a hiring bonus to keep salaries in line. Or it may call for a more holistic approach to regularly reviewing compensation across the organization. In fact, whenever an employee questions salaries, Busch institutes a widespread pay evaluation, making sure that any salary adjustments are made with the whole company in mind.
“If you really need that skillset and it’s going to cause some internal pay inequities, then address the internal pay inequities when you hire that new person,” Busch says. “Often, when we implement new pay ranges, we’ll also do some equity adjustments for existing employee pay, passing on some increase in the job’s market value.”
Spending money in equity adjustments can actually save companies from the long-term costs of disgruntled, unproductive employees or recruiting searches. However, equity adjustments should be combined with performance assessments to avoid unconditional pay raises across the board, which could perpetuate disparities.
Simply flattening salaries, known as compression, is not the solution because competitive salaries are not necessarily equal. Instead, justifying why salary variances exist is a more balanced approach. After all, salaries differ for a reason.
“Pay ranges are intended to reflect differences in performance, experience and contribution,” Handler says. “Little dispersion among salaries is a red flag that the organization is ineffective at differentiating performance. It’s no longer acceptable for managers to keep the peace by giving everybody the same salary. More than ever before, organizations are accepting unbalanced salaries because it’s important to differentiate pay based on performance in order to attract high performers.”