The conundrum I shared in the last edition of The Compversation struck a real chord. And that’s not surprising: many employers are grappling with pay gaps created at the point of hire.
The good news? More and more of us are finding the courage to make fairer decisions about pay. Comp & ben teams are working hard to close pay gaps. Recruiters are standing firm on salary ranges, even when candidates ask for less than the minimum.
There are good reasons to be hopeful. But that doesn’t mean the ‘leaky bucket’ problem in recruitment is anywhere close to being solved.
Because, sure: we can all agree that low salaries should be brought up to market level — especially in this new era of pay transparency. But what about the opposite situation? This is where things get uncomfortable: what do you do about people who are paid too much?
One comp & ben professional got in touch after my last newsletter to share the impressive work his company is doing to address underpaid employees. The next step — which is much harder — is what he called ‘cleaning up from the top’.
Doing whatever it takes to land a superstar employee
There are many ways employers can end up with an overpaid employee in their ranks. For example, this situation often arises when recruitment and HR work in silos, with each team focused solely on their own goals.
Recruitment teams are working to secure the best candidates as quickly as possible — while HR are more concerned with ensuring internal cohesion and fairness. Plus, recruiting for certain strategic roles often happens in a big rush, simply because leaving them vacant for too long can jeopardise the smooth running of the company.
(And that’s not to mention the risk of burnout for existing employees who have to pick up the slack until a new hire finally joins the team).
So it’s in everyone’s interest to close the deal quickly — especially when we’re trying to land a ‘superstar’ candidate with offers from several competing companies.
Having these highly promising employees on your team can be a real competitive advantage. As employers, we often end up going all out to recruit them — which can mean offering packages that are way out of line with the rest of the team.
This is especially true when we’re hiring for highly in-demand, specialised and expert roles.
In fact, this is something I can attest to myself, having spent a long time working in the tech industry. I’ve seen salaries skyrocket for roles like machine learning engineers, product managers…
There was also a short-lived but significant surge in demand for Blockchain developers. And more recently, we’ve been seeing the same thing happen for candidates specialised in AI or cybersecurity.
In the rush to grow quickly and land the best talent in these highly competitive fields, we often leave equity by the wayside. And the problem only worsens with each new hire.
We tell ourselves that we can always fix these problems later by closing the gaps between new and existing employees. But sooner or later, the situation catches up with us, and we’re left facing a lose-lose situation.
When new hire salaries are too high, no one wins
Integrating a new hire into a team is always a risky bet. For example, imagine a team of 10 people that’s running well. Everyone is accustomed to their roles and each other, making the team a well-oiled machine. And above all, their salaries are all harmonised.
Now let’s imagine we hire an 11th person — we’ll call her Emily.
Emily’s arrival has the potential to massively shake things up for the team, especially if she’s hired at a much higher rate than her new colleagues. Granted, Emily is a graduate of a prestigious school and has plenty of experience at a leading company… it’s not (necessarily) that her salary isn’t deserved.
But for the loyal employees who have been at the organisation longer (and who are also skilled and experienced), it’s a bitter pill to swallow. And it probably won’t be long before you see the first resignations.
A recent study published in the Harvard Business Review found that if salaries aren’t quickly adjusted after someone like Emily is hired, existing team members are twice as likely to leave. Worse, it’s usually top performers who are first to jump ship. They feel undervalued, or like they’ve been taken for a ride (this is an example of what researchers call the ‘sucker effect’).
And in a way, they’re right to leave: it’s a long-held truth that changing jobs is the most effective way to increase salary.
But that’s not the end of it: Emily doesn’t win in this situation either. No one told her during the hiring process that her salary was already at the top of the range for her role…
That means raises are likely to be slow — or even non-existent — for years to come. Recruiters or HR teams sometimes conveniently ‘forget’ to mention this small detail to help close the deal with a top candidate, telling themselves they can deal with it later (another case of kicking the can down the road).
Add to that the chilly reception from her new colleagues, and it’s clear that Emily’s new job hasn’t got off to the best start. In the end, this one hiring decision upsets 11 people and costs the company far more than Emily’s salary.
Employers can no longer count on the ‘mobile phone effect’
The job market has a lot in common with the housing market. To assess the value of a property, you don’t look at what you paid for it 20 years ago — you look at recent sales in your area.
And it’s the same with employees. The salary of someone who has been in a role for several years is rarely a reflection of their true market value.
Instead, it’s the result of a historical decision made at the time of hiring, followed by incremental raises over the years since then. These are usually not enough to keep pace with the market, especially in times of high inflation like we’re seeing today.
To hire new talent, companies have no choice but to match market rates — even when we’re not talking about ‘superstar’ candidates. But when it comes to retaining their long-serving employees, they tend to rely on inertia.
This is what I call the mobile phone effect: mobile providers offer great deals to attract new customers, but their offers become far less appealing once you're locked in.
And you’re not stupid: you know your plan isn’t ideal and you could probably get a better deal elsewhere, but…
There’s a cost to switching, so you stay. It’s the same with employees: they know they could land a higher salary by moving jobs, but that takes a lot of time and effort.
My take? In the age of transparency, the mobile phone effect is going to lose its power for employers.
Soon, everyone will have an understanding of the state of the market. It will be easy to check what you’re worth — just look at the salary ranges posted for similar roles at other companies.
Employers that let their internal pay gaps widen and fail to adjust salaries with each new hire risk seeing their turnover skyrocket… not to mention facing legal exposure under the new EU Pay Transparency Directive.
To retain and engage top talent, employers will need to straighten up their recruitment processes, continuously audit their pay structure for internal inequities, and act fast to correct them.
Keep the conversation going
Here’s a selection of content to give you food for thought on this topic. And if you’ve come across any interesting reads, feel free to share them!
When New Hires Get Paid More, Top Performers Resign First — Andrea Derler, Peter Bamberger, Manda Winlaw and Cuthbert Chow, Harvard Business Review
A fascinating article in the Harvard Business Review, highlighting the impact of overly generous hires on existing teams: when salaries are adjusted immediately after a new hire, employees are more likely to stick around.
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