HR Management & Compliance

Quicker Pay Increases May Save Your Best New Hires

By BLR Founder and CEO Bob Brady

Employers are typically reluctant to give pay raises to new hires, especially because of compression issues, but one expert our CEO heard at a recent HR conference says, “Raise ’em or lose ’em.”

As new employees learn, their value increases quickly as their output reaches that of an experienced worker. Unless pay increases follow the same curve, you risk losing those employees,” says Barry L. Brown of Effective Resources, Inc., Holiday, Florida.

Speaking at HR Southwest’s HR: Passport to Success meeting in Ft. Worth, Texas, Brown showed several graphs that approximated a “learning curve.”


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The curve is steep and then quickly turns flat for simple jobs such as, say, window washers. It is slightly less steep but then continues upward at a much slower pace for more complex jobs. Few jobs, in Brown’s view, require more than 2 years for employees to reach median performance levels.

Are You Behind the Curve?

To judge where an employee’s pay is relative to Brown’s learning curves, two critical questions have to be answered: 1) “How long does it take for a qualified person to become really good in a given job?” 2) “How long does it take to move from the hiring rate to the midpoint of your pay grade (which is probably roughly market value)?”

If there is a difference of more than 6 months between the answers to those questions, you’ve probably got high turnover, says Brown.

His reasoning is that the employees’ pay has not kept up with their skill level. In a tight job market, many employees will quickly see that the grass really is greener on the other side of the industrial park. (Note: Brown is a very experienced HR and comp professional. His firm specializes in pay and performance consulting.)

Simple Formula Pinpoints Your Position

In his view, the midpoint of a pay grade is where an experienced, fully productive person should be. If your pay system gets new employees to that level at too slow a pace, you face the danger of losing them. He proposed a simple formula for auditing any job:

First, find the percentage between the entry rate and midpoint.

Then, divide the answer by the number of years required to achieve competency. (For example, if the minimum is $10/hr, the midpoint $12.50, and it takes 3 years, then it will take raises of about 8%/year to reach the midpoint in 3 years (not accounting for rate range increases due to cost of living.) If a beginner gets raises lower than 8 %, it will take longer to reach the midpoint.


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Raises Are Expensive, But so Is Turnover

Few companies are that liberal with their pay increases, but it may be pennywise and pound foolish, because SHRM estimates that turnover costs 1.5 times annual salary, when all soft costs are considered.

Brown says that, even looking at just the hard costs of turnover, it’s easy to see the impact. “To be conservative,” he says, “let’s use just $10,000 as the hard cost of one turnover. If you have 10 turns, that’s $100,000. At current margins, what does $100,000 represent in sales?” he asked.

How We’ve Managed at BLR

At BLR, we’ve learned the hard way the truth of what Brown says. When we were starting out (and even now), it’s been tempting to hire beginners at low rates and train them, thinking we can save money. The problem is that, when they get up to speed, their gratitude is short-lived. (Why should it be otherwise? They’ve got car payments and mortgages, too.)

We’ve found that we have had to raise their pay quickly or lose them. Sometimes we didn’t, and our shortsightedness cost us good people. (And it may have also lost us good people unwilling to accept a low starting wage.)

However, if we hire closer to the midpoint, what Brown says has less relevance. This will increase costs over the short run, but may not have much long term impact if subsequent pay increases are kept under control (always a challenge).

Our method for managing pay increases for employees at both the high and low end of the pay range has been to use a grid that arrays performance in one dimension and place in the rate range in the other.

Higher performance gets a higher increase than low performance, and those low in the range get a higher increase than those high in the range.

When the two factors are combined, the highest percentage increases go to those whose performance is high and whose place in the rate range is low. Conversely, those who are high in the range with lower performance get little (or no) increase.

Superior performers who are high in the range don’t like the fact that their increases are relatively low, but if the rate range is set correctly, then the low percentage increase is simply a reflection of economic realities. A given job is worth only so much to the company.

That’s my e-pinion. I’d love to hear yours. Use the Share Your Comments button below or mail me at RBrady@blr.com

1 thought on “Quicker Pay Increases May Save Your Best New Hires”

  1. Bob,

    Bingo! You hit this issue squarely on the head! If the employer doesn’t want to pay too much — start lower and give frequent raises in the early months of employment. Even if you have to simply reward an employee for showing up to work — something as easy as a simple wage increase can be a great motivator. I am a compensation and research analyst/consultant and I totally agree with this philosophy!

    HRChar

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