In Today’s Competitive Market, Are Annual Pay Raises Too Little, Too Late?

As challenging as it is to attract talent in today’s market, retaining existing talent is becoming a close second in the HR headaches category. The ‘Great Resignation’ may be waning, but workers are still ready to move if the offer is attractive enough.

Passive recruitment methods on social and professional media platforms are targeting employees who aren’t actively looking for a new job. Others, satisfied where they are, are still tempted to take a peek at what’s out there — and often tempted to take an interview. Those temptations are leading to higher turnover than most companies have ever experienced.

Some estimate the average cost to replace a worker is about $4,000, depending on their wages. In years past, the higher up the corporate ladder the more it cost to recruit. These days, with turnover so high in front-facing positions, it may be more costly to keep entry-level workers on the payroll than retaining the C-suite.

The competition is fierce, but many companies are overlooking a simple method to retain talent. If your recruitment budget is out of control, it might be time to increase your retention budget.

Are your workers struggling financially?

The case for upping your retention game is strong these days. Inflation is putting the squeeze on American workers. The Bureau of Labor Statistics recently published that average hourly wages increased between February 2021 and February 2022, from $30.04 to $31.58, or about 5%.

But, they add, the news isn’t good. Inflation during that period set worker’s wages behind, actually shrinking by 2.6% during the same time frame. Inflation has not only negated wage gains, it put most workers behind.

If staff members are struggling to keep up with the cost of living, including the increasing cost of gas, you may be able to help them manage their finances as you manage head count. There are ways to ease the burden of inflation with efforts that you’ve probably already factored into your budget.

Consider increasing frequency of pay raises

Consider turning annual raises into smaller, biannual raises to help retain talent. Assume you’re intending to increase a worker’s salary by 5% after their annual review. If they currently earn $50,000 per year, at the anniversary their salary will increase to $52,500. If you offered half that raise ($1,250) at 6 months, or 2.5%, they’ll see an increase of about $50 per paycheck.

Your total cost will increase from $2,500 to $3,750, but you may be saving money in the longer-term. That $1,250 could mean retaining a valuable employee and deferring the high cost of recruiting their replacement. At $4,000 per staffer to replace, you may be ahead nearly $3,000.

Consider one-time bonuses to help retain staff.

Consider one-time bonuses to help retain staff. Providing a bonus doesn’t increase the employee’s base salary, which results in less cost to the business overall. The amount may be the same that you’d consider for a raise.

Paid out in a lump sum, bonuses can help workers with immediate costs and keep payroll numbers constant throughout the year. Even if you don’t routinely hand out bonuses, offering employees a surprise bonus occasionally not only helps them, it raises morale and company loyalty. If they don’t know when or why one is coming, they may be more apt to stay on the payroll in anticipation of the next.

Some companies pay bonuses for hitting target numbers or when business is good. These can be a welcome surprise throughout the year, rather than an anticipated bump at the end of 1.

If you are in the habit of offering bonuses, consider making them more frequent — even if they’re not as high. These can help workers offset rising costs, and provide a welcome boost to morale.

What can you do if company funds are tight?

As the cost of living is hurting employees, the cost of doing business is hurting their employers. Business leaders are struggling to keep pace with higher costs of goods and services. For some, managing payroll as it stands is a difficult enough: considering adding more costs is untenable at this time.

There are ways you can help workers without breaking the bank. If you can offer staffers the opportunity to work remotely, do. One day a week working from home reduces commuting costs, either by public transportation or at the pump, by 20%: 2 days 40%. This can be a significant savings for staff.

Another possibility is a shortened or compressed workweek. Businesses began considering a 4-day week long before COVID; but in the post-pandemic world, the idea is gaining traction. Employees save on commuting costs, and businesses typically see an increase in productivity, motivation, and retention.

While a 4-day week isn’t for every business, it’s something to consider as a perk to help keep staffers on your payroll, and not someone else’s.

Expectation versus reality of raises and compensation

A Monster survey revealed 18% of workers have never had a raise; 26% haven’t had 1 in more than a year. Wage stagnation is a huge contributor to employee turnover. The average American gets about a 3% annual increase, according to Mercer: for 2022 that may increase slightly. For many workers, by the time annual raises come around, it’s too little, too late.

The high cost of churn is making many employers rethink their annual increase budgeting. Leaders are looking to pre-pandemic metrics to inform how to move forward. Before COVID, most companies experienced about 15% turnover annually.

During the 2 years of lockdowns, turnover skyrocketed, either voluntarily or involuntarily. As we return to routine, the target, even in this challenging market, should be to normalize turnover rates to pre-pandemic levels.

Getting there will require businesses to look at overall compensation — are you competitive in the marketplace? There’s no hiding from higher wages across almost all industries. If the talent you have is more valuable to someone else, it’s time to consider how much you’re willing to pay to keep them.

Beyond making sure wages are aligned with the market, raises and bonuses may be a tipping point in your favor when it comes to retention. The more frequently you can provide them, even at a slightly lower rate, the more likely you’ll retain talent.

The truth about talent: do all you can to retain good workers

Your employees may be actively looking for another job, or they may be poached by a competitive business. The truth is, few talented staffers would have trouble finding another job. The prospect of a higher starting salary, signing bonuses, or better benefits and perks can make even the most loyal staff member think about making a change.

The more you can do to retain, the lower your overall costs.

As much as they may love working for you, employees must prioritize their own financial interests. It’s wrong to assume even satisfied employees are not at risk for flight. The more you can do to retain, the lower your overall costs. More frequent raises may be a smart investment will be when you factor in savings on recruitment, training, and getting a new staff member up to full productivity.