The Great Resignation has broken salary reviews: so how do organisations fix it?

Across the world, lockdowns are easing and business leaders’ confidence is rising, as reflected in PwC’s Annual CEO Survey. But even as the outlook brightens, the challenges facing HR teams are multiplying. Why? One of the reasons is that people are switching jobs like never before – upending decades of received wisdom on what it takes to attract and retain employees. 

We all know the story. In a few short months, the ‘Great Resignation’ has escalated from a glib phrase into an urgent strategic and operational issue for businesses everywhere. As evidence, here’s just one statistic among many, from my own country: a PwC survey of 1,800 Australian workers in late 2021 found that 38 per cent were looking at leaving their employer within the next 12 months. And that figure’s relatively low in global terms.

For many organisations and their HR functions, it’s a looming cliff-edge. But another finding from PwC’s research is equally telling. Despite the prospect of a mass loss of talent, 48% of business leaders tell us they have no plans to redesign their Employee Value Proposition – of which reward makes up a large proportion.  

The salary game has changed… 

The implication is clear. Companies know that the salary game has changed – but they’re failing to respond by changing how they play it. Today, as companies approach their year-end remuneration reviews, I’m seeing most stick with the traditional budget increase of 3% to 4%. In my opinion that this no longer makes sense.

Why do I say this? In many organisations and across entire industries, employees are leaving in droves because they're being offered huge pay rises to move elsewhere. So companies are poaching from other businesses by paying a premium. However, once you’ve recruited someone by paying them – say – 20% more than previous going rate, that increased spend is locked in. And it doesn’t show up in your annual budget data – which is still around 3%.

…creating a host of potential problems

This means the seemingly unchanged budget masks several problems – including a higher cost base, and the intensifying need for greater capability and productivity amid an intensifying talent squeeze. What’s more, recruiting new people at bumped-up salaries while offering only small increases to existing staff (including high performers) is a recipe for workforce tensions and disillusionment, with people feeling either undervalued or overly superior depending which side they’re on. 

To compound the issue, the annual review isn’t so annual any more. To try and staunch the haemorrhage of staff, more and more companies are resorting to out-of-cycle pay reviews and ad-hoc targeted uplifts. These reactive approaches – effectively ‘chasing’ the rising market – continue to ratchet pay upwards, and are often skewed towards the more senior roles. The result is simply an intensification of the problems I mentioned above and even worse, creates more unfairness and inequity.

Taking a holistic view – and rethinking three components

The inescapable conclusion? In a world where talent is jumping for a lot more money, the annual incremental salary review is past its use-by date. What’s needed is a new model. Salary will always remain important to people and the cost of replacing talent is skyrocketing. Competing with these recruitment premiums is almost impossible, but a larger salary pot is needed as long as it is better directed to the right people and in the right proportions. Coupled with this is recognising that salary is just one part of what makes someone join or stay. This means rethinking three components.

First, monetary compensation. PwC’s analysis shows the relative importance of financial compensation has declined by 11% over the past decade. The importance of other types of benefits – medical, dental, vision, and life insurance; wellness and supplemental health benefits; and child care – has doubled. And work/life balance options and training and career development have tripled in importance. So companies need total reward strategies that strike a new balance between salary and other benefits. More specifically I can see a world that includes other types of reward and benefits as part of the annual or bi-annual review rather than just salary.

A further factor is variable pay programmes. While these still have a role, the risk in an environment of higher cost of living is that they’re pressured to pay out with greater certainty, creating an entitlement culture. So companies need to reconsider the purpose and structure of variable pay programmes. Such a move is already being foreshadowed by the growing use of team-based incentives and profit-share schemes (with lower amounts and greater certainty of payout), as opposed to incentives based on individual KPIs (with more leverage, higher payouts and less certainty). 

The second component is the employee experience in their remuneration review. This has generally been deteriorating for some time – and many businesses now think more about how to minimise the impact of disappointment than celebrate an individual’s contribution and reward them accordingly. 

How to improve the experience? The base minimum is that the review process is fair. This means applying and demonstrating even-handed and consistent decision-making – including being more transparent about the reasons for decisions and the data supporting them. Historically, most companies would have rejected the idea of being transparent about pay scales. Maybe the time is coming when full transparency actually serves them better and forces leaders to justify pay decisions.

The third component to revisit is the HR function itself – and specifically its need for technology and data to meet the growing pressure to deliver. For HR to create and manage the more responsive and transparent employee offer and experience now needed, technology is critical. I’m always amazed by how many organisations still rely on spreadsheets and ‘work-arounds’ in people management, adding unnecessary risks, inefficiencies and cost. HR needs to argue for – and secure – sufficient investment in technology to do its job well.

Succeeding in a world of mobile talent

As with so many other aspects of business, the effect of the COVID-19 pandemic on the workforce has not been to generate new trends, but to accelerate and amplify those that were already underway. But whatever the causes, employees today are rethinking many aspects of their lives, with work topping the list. As companies look to respond, doing more of the same won’t work – and HR is in the front line. 

Employees’ expectations are rising and they’re voting with their feet. So businesses must think differently about their reward strategies and structures, with the watchwords being consistency, transparency and fairness. The time to do this? Today. Before it’s too late.

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