COMP NEWS – A new study out of the Harvard Business Review is shining a light on the effects of paying new hires more than existing employees in similar roles.

To attract top talent, employers often pay new hires more than they pay existing employees in equivalent roles. This isn’t new. But today, regulatory changes and technological advances have dramatically increased pay transparency in many sectors, making employees more aware of these pay disparities. Moreover, data from the U.S. Chamber of Commerce indicates that the workforce is expected to shrink in 2024, while a global survey of more than 30,000 employees found that salaries are expected to increase by an average of 4% in 2024, suggesting that these pay gaps will likely continue to expand.

According to research, about one in four resigning employees can be classified as “high performers.” However, in the aftermath of introducing higher-paid new hires to an organization, that number rises to one in three.

Through our first round of analyses, we determined that employees whose pay was increased soon after the addition of a higher-paid coworker tended to stay in their jobs a lot longer, whereas those who had to wait for a raise were more likely to quit.

 

When pay was adjusted within a month of the new addition, existing employees remained with their companies for an average of another two and a half years. In contrast, when pay adjustments took six months, employees stayed on board for an average of just one and a half years, and when pay increases took an entire year, employees quit an average of just 13 months after the new hire joined. In other words, employees resigned more than two times sooner if their employers took a year to adjust their pay.

 

In a second round of analyses on the Visier Community Data, we found that high performers were disproportionately represented among resigning employees. While normally, about one in four resigning employees are high performers, in the aftermath of the addition of a higher-paid new hire, that number increases to more than one in three. In other words, hiring new employees at higher salaries than existing employees doesn’t just lead to generally higher turnover rates for current employees — it increases attrition specifically among the employees who add the most value to their organizations.

The study found that even organizations with limited pay transparency are affected by fears of inequitable compensation.

Our findings suggest that even in organizations with limited pay transparency (i.e., in which existing employees may not know how much a new hire is making), just the knowledge that new team members are being hired at all can foster fears among existing workers that they may not be being paid fairly. A new employee joining the team serves as a reminder that switching jobs is always an option, pushing people to do a reality check around their own job satisfaction.

 

And finally, existing employees are likely to resign in response to sustained pay disparities because these situations significantly erode their trust in their teams and broader organizations. When people perceive their organizations as treating them unfairly and paying them inequitably, their morale and commitment falter, making them that much more likely to start looking for the door.

To read the survey, click here.

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