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31 Oct 2018

Reward Director Masterclass: the role of pay in talent retention

For employers in the UK the current labour market landscape is challenging, with reductions in labour supply, continuing weak productivity and uncertainty over Brexit. Labour turnover is also on an upward trend, with the latest CIPD Labour Market Outlook (summer 2018) reporting a rise to a median figure of 16.5 per cent.

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The issue of employee retention is clearly paramount, but the role pay plays in holding onto talent has been hotly debated in recent years, and by pay I mean cash.  The cynics among us might say this is due to low pay budgets providing employers with no choice but to look for other means with which to engage and retain employees.  So how relevant is pay as a retention tool today? 

Pay as a motivator

It’s worth considering what role pay has in workplace motivation more generally. Hertzberg’s two factor theory of job motivation (Hertzberg 1959) has shaped the historical debate on workplace behaviour and the impact of pay in employee engagement. Pay has usually been regarded as an extrinsic factor (or hygiene factor) that was more a job dissatisfier than an intrinsic motivator leading to increased job satisfaction. Studies show that the correlation between pay and job satisfaction normally trends as low as two per cent.

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Dan Pink, in his regularly cited book Drive, built on this argument suggesting a new model is required for the 21st century; and particularly for working environments that do not rely on pure productivity to succeed, such as knowledge work, creativity and problem-solving. Therefore work is less based on carrot-and-stick motivators. He argues not only that this approach doesn’t work but often does more harm.

Similarly, author and business thinker Tammy Erikson, is a big proponent of the fact that work is becoming a matter of discretionary effort and that to truly engage employees you need to recognise that they want to deliver things like extraordinary service, share ideas collaboratively, innovate, gain skills and have experiences. In this environment, intrinsic rewards are more important than extrinsic and she proposes in a Harvard Business Review article that “meaning is the new money”.

Then there is also the view that today’s millennials as a group are more intrinsically motivated. Deloitte’s Millennial Survey (2015) stated their primary motivation isn’t directly related to money, with 50 per cent saying they would be willing to take a pay cut to secure a job that aligns with their values and ambitions.

As a result of the belief that intrinsic reward is more effective as a motivator, we’ve seen a significant growth in the recognition or non-cash reward sphere trying to tackle engagement beyond the pay packet. Yet we are still not seeing a significant uptick in trends of employee engagement or a reduction in turnover.

Factors holding back higher engagement

Maybe continuing sluggish wage growth is to blame. The Office for National Statistics UK labour market for October 2018 estimated average weekly earnings for employees in nominal terms (not adjusted for price inflation) increased by 3.1 per cent excluding bonuses, and by 2.7 per cent including bonuses, compared with a year earlier. But the picture is worse in real terms (adjusted for price inflation), with pay increasing by 0.7 per cent excluding bonuses, and by 0.4 per cent including bonuses, compared with a year earlier. Many employees staying in the same role with the same employer have seen little real income wage growth for a number of years.

Against this background it’s worth considering Maslow hierarchy of needs (1943) which demonstrated that every person has a set of needs, which are ranked in a scale based on how necessary they are. To help employees fulfil their higher level esteem needs, employers must do more to show their staff that they are appreciated. Esteem needs include: self-esteem, confidence, achievement, respect of others and respect by others.

In this model, salary is a basic need, but if not met then will override higher level needs. Motivation Crowding Theory (Frey and Jegen, 2001) follows the same thread, it’s still important that extrinsic needs (money) are right otherwise they will disproportionally crowd out any other efforts you make on intrinsic reward.

Pay still matters

So maybe getting the basic money equation right for your employees is important. Money still confers value, and the right money makes less-than-ideal work situations tolerable, at least for a time. No matter how much an employee may love his boss, his job tasks, his co-workers and conditions of employment, if he’s not making enough money to meet his financial goals, he’ll eventually move on for greener pastures.

This is even more apparent when you consider research from the Resolution Foundation, that highlights that pay growth for people moving jobs in the last 12 months hit 11 per cent earlier this year, the highest growth rate for people switching employers in the UK since the early 2000s. This is compared to pay growth for the vast majority of workers who stay with their employer which remains rooted at just 2.5 per cent. It’s easy to see why the pay bump you get from moving jobs is becoming known as the “disloyalty bonus”.

The 2012 World at Work Retention of Key Talent and the Role of Rewards – WAW Survey on Reward and Engagement also found the primary reason why key talent left organisations was an “opportunity to earn more pay elsewhere”, showing pay to be a principal hygiene factor. The next most-cited reason was “lack of promotional opportunities”, followed closely by “feelings that pay levels are unfair relative to others outside the organisation”. Tied for fourth place were “dissatisfaction with job or work responsibilities” and “feelings that pay levels are unfair relative to employee’s performance and contribution”.

Fairness is an critical concept in pay

It’s important to note here that “feelings that pay levels are unfair relative to others outside the organisation” was a key factor. When considering employee engagement and pay, fairness is a critical concept. Exit interviews show that more often than not when an employee leaves for reasons relating to salary, it is more to do with whether they thought they were being paid fairly rather than the absolute amount they were paid.

In fact, pay transparency is emerging as a key theme in reward management, partly driven by equal pay legislation and regulatory initiatives, but also by the changing expectations of employees who have easy-to-access pay information online. Although, fairness isn’t provable and is too emotive to be quantifiable, employees want to know how their pay is determined, how they can influence their pay and how equitable their pay is. 

So in today’s challenging employment environment pay still has a critical role to play in employee retention. But the challenge for employers is how to differentiate pay to motivate high performance, manage pay equity between new hires and existing employees, meet increasing demands for pay transparency and demands from employees for more intrinsic motivational factors. There is an equilibrium to be found but it will be heavily influenced by the culture of your organisation and the demographics of your workforce.

This article was provided by Curo.

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