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Is Compensation to Blame for Your High Employee Turnover Rate?

Jen Dewar
Aug 17, 2022 6:00:00 AM

Compensation and employee turnover are intrinsically tied. In fact, low pay was the top reason for employee turnover in 2021, with 37% citing it as a major reason for leaving and another 26% citing it as a minor reason. Many workers are reaping the benefits, as 29% of those who left their organization during the pandemic received a 30% increase in compensation and 20% now make 10-20% more.

The growing concern with employee turnover

High employee turnover is expensive. Replacing exiting workers costs one-half to two times an employee’s annual salary. This cost is often considered higher when an employee leaves before reaching full productivity, which is clearly the case for the 30% of job seekers who have left a job within 90 days of starting.

In addition to cost, there is a tremendous effort involved in backfilling positions, with almost two jobs for every unemployed person and a significant skill gap in the talent market. There simply aren’t enough qualified workers to go around, giving talent the upper hand in the labor market. And compensation isn’t just a common reason to leave a job, it’s also a major consideration when accepting a new one. These challenges have significantly impacted both time and cost to hire, making employee retention more important than ever.

How to know if compensation is playing into your turnover rate

The reasons for employee turnover vary by organization, so it’s important to understand the role compensation plays for your unique workforce. A great way to do this is to simply ask your employees for feedback through a survey tool or platform like Culture Amp or 15Five. Let your employees know how much you value their feedback, offer them a way to provide it anonymously, and follow through to make necessary improvements to your organization. Ask specific questions around compensation as part of your employee engagement and exit surveys to learn how it plays a role in employee satisfaction, retention, and turnover.

Employees may not be entirely forthcoming in these surveys, so it’s also important to gather feedback around compensation via your managers and online review sites. Your managers are at the forefront of employee retention efforts and, often, compensation conversations, so tapping into them can provide valuable insights. Still, some employees will prefer the anonymous nature of online review sites, so it’s also important to monitor those as well.

Finally, you should tap into your own data to identify ways compensation may be affecting your employee turnover rate. Here are some areas to consider digging into:

  • Employee tenure: It’s fairly common for newer employees to earn more than their longer-term counterparts. The market changes quickly, and you’ve likely had to make more competitive offers in order to win talent for your team. Plus, early employees may have been offered lower salaries in exchange for more equity, and often only receive a standard 3% raise. See how many employees you’ve hired in the past year are above, in, and below band, and compare that with employees who have been with your organization more than a year.
  • Gender and ethnicity: People from underrepresented groups tend to earn less than their peers. For example, women earn 83 cents for every dollar earned by white men and Black men earn 87 cents. Take a look at how each group falls into their respective pay bands, and how that compares to other groups and the organization as a whole.
  • Team: If you have a certain team or department with high turnover rates, compare that team’s salary band distribution with other teams, and across the organization. Also consider whether any salary bands need to be adjusted based on current market rates and your compensation strategy.
  • Employee vesting: If employees are vesting soon, they may be enticed to leave and seek additional equity elsewhere. Keep an eye on which employees are vesting over the next year, as well as which departments and managers have several employees vesting. This allows you to sync with managers and employees to offer additional equity grants, salary adjustments, and other employee retention measures.
  • Compa-ratio distribution by job function: Finally, look at how individual employees compare to others with similar responsibilities. It’s possible that a rockstar employee has been neglected over the years due to management changes, but recognizing that fact can help you get ahead of retaining them.

Next steps to improve employee retention through compensation

Between the high cost of employee turnover and the high competition to backfill talent, innovative organizations understand the importance of investing in employee retention. Often, this includes the need to evaluate your compensation strategy, and build a plan to ensure it supports retention. This may include providing opportunities for advancement, improving pay equity, bringing employees in band, offering additional equity grants, adjusting salary bands before your next review cycle, and increasing pay transparency.

Then communicate this plan with your managers and employees and follow up with results when the plan has been put into place. Effective communication around compensation is just as important as the compensation itself, so don’t forget this critical step. When only  37% of employees feel like they’re paid fairly, this could be the difference between retention and turnover.

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