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Robert Sweeney, CEO and founder of technical recruiting firm Facet, told a story on LinkedIn recently about when he was a software engineer at Netflix. One day his boss marched into his office and informed him that he was giving him a raise. He’d been on the job only a few months. 

“Cool!” Robert said. “But why?”

Because, he was told, the company brought in another engineer who negotiated a higher salary and they wanted to match it.

If this sounds like a fairy tale that’s too good to be true, that’s because it usually is. 

Research shows that incumbent employees are falling behind new hires

A new study by compensation data provider LaborIQ surveyed 20,000 different job titles and found that salaries for new hires are, on average, 7% higher than what current employees earn in similar positions. For in-demand jobs in tech and finance, the pay gap can stretch to as much as 20%.

Call it a loyalty tax or a penalty for staying put, but one thing’s for sure: It can feel like a slap in the face to anyone who’s stuck with an employer through the highs and lows of the past few years. 

“Don’t punish loyal employees for sticking with you by allowing their compensation to fall behind the market,” Robert says in his post. More than half a million people gave it a thumbs-up. 

“We’ve noticed for some time that incumbent employees are being punished in their paycheck for being incumbent employees,” says Stefan Gaertner, partner at Aon’s Human Capital Solutions. “If you’re an incumbent employee, you make 10 percent to 15 percent less than new hires.”

Loyal employees are sometimes being asked to do more than ever before

Many of these same loyal employees are already feeling taxed from having to shoulder more work as their colleagues disappear and positions go unfilled. Add to that the worst inflation in four decades and you’ve got a workforce in turmoil, where often tensions are high, morale is low, and your best employees are suddenly eyeing the exits. 

Of course economists say this is normal. John Robertson, a senior policy adviser at the Federal Reserve Bank of Atlanta, which tracks salary compression, says it comes down to basic supply and demand. Employers are operating in a tight labor market and therefore have to compete fiercely to attract top talent. And nothing says “come join us” quite like a big pile of cash. (Conversely, he says, when the market softens and the economy is weak, stayers tend to outearn shufflers.)

For today’s HR professionals, the scenario can play out like a slow-motion train wreck. With salary transparency on the rise, there’s a strong chance your loyal incumbents will know when they’re being undercompensated. The question remains, What can companies do to mitigate the fallout and hold on to their most committed workers?

Consider giving your loyal employees a retention raise

Adam Grant, an organizational psychologist and best-selling author of Think Again: The Power of Knowing What You Don’t Know, chimed in with a solution on LinkedIn. “Hey managers: why not offer a retention raise instead? Commitment should be rewarded, not punished.”

The just pay ’em approach seems to be popular — more than 100,000 people liked Adam’s post. And some companies are doing exactly what Adam suggests.

The Seattle-based compensation data firm Payscale audited its 600 employees to see how their pay stacked up in today’s market. As a result, workers got a salary bump of up to 20%, bigger than in previous years. “We want to make sure that the offers we’re making externally in the market and our current employees match up,” Lexi Clarke, the head of people, told Business Insider. 

Big tech has also entered the fray. Last month Microsoft announced widespread pay increases after an internal survey showed that employees were dissatisfied with their compensation. The company, which owns LinkedIn, nearly doubled its budget for salary increases and pumped up its stock awards. Thousands of employees will receive raises in the fall.

Identify problems areas and focus on addressing those first

Even if companies have deep enough pockets to pay employees, they’re still faced with the challenge of hitting a moving target. Labor markets shift from quarter to quarter — and lately, it can seem, day to day. To truly stay on top of pay compression, you’d need to be constantly auditing salaries. (In reality, the employers who do run audits say they do so about once a year.)

Then there are those who think it’s best to slow your roll. Reacting too swiftly to fluctuations in the market can result in unnecessary salary adjustments on a broad scale. “It is possible to overcorrect,” Catherine Hartmann, an HR veteran with 20+ years of experience, told SHRM.

Instead, she recommends identifying problem areas and making the necessary tweaks. Often that starts with asking questions: Is your company using the correct market data to evaluate compensation? Are the current pay ranges compatible with your talent requirements? If during the process you find that pay compression remains an issue, “it may be time to look at the whole family of jobs,” Catherine says.  

But what happens if, after all the diagnostics and internal soul-searching, employers simply don’t have the money to pay their stayers?

Final thoughts: Look at all the reasons employees are reshuffling and creatively address the ones you can

“We’ve seen organizations really put their thinking caps on,” says Dawn Fay, a senior district president at recruiting firm Robert Half. In lieu of pay hikes, employers have had to get creative, handing out everything from gym memberships and tuition reimbursements to more career advancement and remote work opportunities. 

In other words, some of the very things that sent the shufflers shuffling in the first place.

Responding to Adam’s post, writer-therapist Natalia Rachel says that the Great Reshuffle is about more than money — it’s about people choosing a different way of life. “This is a long term process,” she says, “not something we fix with Band-Aids. The world has changed. . . . We want freedom, well-being, flexibility, and aliveness.”  

Further down in the thread, a graphic designer from Tennessee thanks Natalia for the powerful insight, but admits that “a retention bonus sounds like a kick-ass idea.”  

*Photo by Mathieu Stern on Unsplash

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