As remuneration budgets shrink and companies see limited opportunities to move employees’ remuneration in line with the overall market position, it’s highly likely that new employees commence in their roles on higher starting salaries.
At Aon, we analysed this situation to understand how starting salary practices have changed and the relative impact of these changes. Most notably, we found that starting salaries have increased relative to the market position over the past four years. Overall, the average starting salary in 2012 was set at 4% below the market median (96% of median). Fast forward to 2016, and starting salaries were in line with the median (100%).
Yet, in that same period of time, the average salary of a promoted employee has been consistently 6% below the market median.
In 2012, the proportion of new starters being paid above median was the same as that for promoted employees, about one-third. In 2016, more than half new starters were paid above the median for their role while only one-third of promoted employees will be.
This gap is significant when you consider the continual impact on the relative remuneration of a promoted employee compared to a new hire.
Let’s assess a few different scenarios:
- If an organisation is using a merit matrix to determine salary increases, with a 4% budget, an existing employee who has been promoted would need to consistently outperform their new-hire peer for five years before they closed the pay gap. In 2012, when new hires were typically hired at just-below the market median, this pay gap would have been closed in just two review cycles.
- If this same organisation then leverages a 2.5% budget (which is in line with current market budget rates), the change in starting market position means that it would take eight years of consistent high performance for the existing promoted employee to be paid in line with the new hire.
- If both fictional employees delivered the same performance, under a 4% budget, it would take eight years of the two employees achieving ratings of ‘exceeds expectations’ to have their remuneration on par. However, under a 2.5% budget, they would never achieve parity – we assume they would give up and leave after ten years in this capacity!
The fact remains that this is the ‘new normal’, as limited budgets and slowed growth in remuneration changes organisational behaviours. Therefore, it is the responsibility of HR and Reward practitioners to adapt and update their policies and principles in line with these new conditions.
What can HR and Reward practitioners do?
Competition for good talent is still an issue for many organisations, therefore, reducing starting salaries is often simply not an option. In light of shrinking budgets and the growing competition for talent, organisations may have to set aside a portion of their annual salary review budget for special cases.
An alternative is for organisations to treat promoted employees in a similar vein to graduates, who are quickly learning and acquiring skills in their new role, by having a separate budget pool and more frequent reviews. As a result, they can pay newly promoted employees higher increases until they have caught up. Concurrently, making managers aware of the relative market position is critical. What organisations cannot afford to do is to put in place a process that drives high potential employees out of the business as they see that their only opportunity for equal pay lies elsewhere.
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