“This candidate is great and is only asking for 70% of what everyone else on the team makes – what a deal!”
“If I promote that person into the team, I can save 20% vs. hiring externally – what a deal!”
“I was able to negotiate the new hire down, so they are only 75% of what we budgeted for – what a deal!”
You hire that person, and pay them 10%, 20%, even 30% less than anyone else in the department or team, saving the company money while getting that great new employee… or have you?
The high price of the salary ‘deal’
A few weeks or a few months go by without a problem, but eventually the employee finds out they’re underpaid as compared to their peers. The bitterness begins. They aren’t worth less than the rest of the team, they work just as hard and achieve just as much – how is this fair?
Soon, their productivity goes down, they start complaining about the disparity, bringing the team culture and morale down spreading animosity, and stagnating others.
And with the lost productivity and morale the cost of that ‘deal’ rises.
Finally, if you’re lucky and the new hire doesn’t just leave or continue to poison the team and culture until they are fired, they ask for more money as it’s only fair. And now you must choose…
No way to win - the costly choices of the salary ‘deal’
1. Do not increase salary.
The employee is disappointed, angry, bitter, left feeling undervalued. After all, how would you feel if you found out you were making only 70% - 80% of your peers for doing the same work?
Their productivity continues to decrease, their complaining about how unfair they are being treated increases, further deteriorating the culture and morale and therefore productivity of the team. Finally, they leave, or are fired, or settle into being a solid ‘C-player’, doing just enough to stay out of trouble but never really achieving greatness.
2. Increase their salary.
The employee is pleased, now being valued fairly. However, their peers find out about this large raise and soon you have others knocking on your door. Others on the team have been working hard for years and they’ve never gotten more than a 3% raise, and now the new person has gotten 10%, 20% or more – how is that fair? They are angry, bitter, left feeling undervalued. After all, how would you feel if you found out that the new employee just got a huge raise you’ve never come close to getting no matter how much you’ve achieved?
Their productivity decreases, they complain about how unfair they’re being treated, further deteriorating the culture and morale. Finally, some leave, or are fired, or settle into being a solid ‘C-players’, valuing the organization as much as they feel valued.
No matter what path you choose, that ‘deal’ has ended up costing the organization decreased productivity, deteriorated culture, and increased attrition. In addition, pay inequality can lead to legal actions, and brand tarnish (such as bad glassdoor ratings) which makes it more difficult to attract great talent.
All of this could have been easily avoided by paying fairly at the start. When it comes to salary, there is no such thing as a deal.
Adding dimension – the inequality of pay inequality
To add even more weight to the pay inequality, which leads to attrition and lack-luster performance, it’s not suffered equity.
For example, according to a glassdoor study in March of 2019, women, on average, earn 21.4% less than men. And a Payscale study conducted from 2016 to 2019 found that overall, Black men made 19% less and Hispanic men made 9% less than White men.
Note, these studies also show that the gap closes if looking at ‘controlled pay gap’ (i.e. like roles and rank), however, that brings up a different issue addressed in a different blog – promotion and title gaps.
With pay inequality impacting some groups more than others, not only can pay inequality increase attrition, lower productivity, and quality of culture, it can also exacerbate diversity and inclusion challenges. For example, by having a disproportionate effect on women and people of color.
There is good news as there is a solution to pay inequality – salary bands.
Salary bands – the fix to the bad deal of pay inequality
To protect against those false deals, set salary bands before hiring for that next job. The salary band (i.e. the lowest and highest compensation for the position) can be set with a combination of the following two sources:
1. Existing range of salaries for that same position.
Map the salaries of everyone who already has that position, or, if you don’t have enough peers, look at those who hold similar levels of responsibilities and functions in other teams/departments. Do a quick check against other data to make sure you uncover any intentional (or unintentional) trends – such as gender and other demographics, time at the organization, time in role, etc. For best practices, organizations like SHRM have detailed materials for conducting a salary band study.
Note: if you do find unintentional trends (such as salary ranges that are different based on gender) or if there are outliers or the bands are too wide, it is probably time to start thinking about doing a larger scale salary adjustment.
2. Industry standards of salaries for that job.
If your organization doesn’t have clear bands, or those bands are not yet effective (such as too wide, or not competitive), look outside. There are many sources to give insight to what others are paying for similar roles such as the US labor department (which can be accessed through career.place), and private organizations such as glassdoor and salary.com.
You can also step into the shoes of your applicants by searching the job boards for jobs like yours to see the salary ranges, benefits, and positioning.
Bringing it all together – applying salary bands to the hiring process
The most important thing about salary bands is to use them!
That means the next time you get one of those:
Wow, this candidate is asking for 25% less than our minimum salary.
Rather than grab that ‘deal’ which could end up costing you greatly, tell the candidate:
“I’m sorry, our minimum is actually $xxx, would you be willing to accept 25% more than what you were looking for?”
Not only will you avoid the costly consequences of pay inequality, you will end up with a highly motivated, loyal employee who feels how strongly you value them from day one.