Does Pay Matter When It Comes to Employee Retention?

January 12, 2022
November 7, 2023
Deanna deBara
Lattice Team

In the midst of the “Great Resignation,” employees are on the move. According to data from the US Bureau of Labor Statistics (BLS), in October 2021, whopping 4.2 million Americans quit their jobs. And according to Lattice’s State of People Strategy Report 2021 (SOPS), more than half of the respondents surveyed (51%) reported an increase in turnover over the last six months.

With so many employees rethinking — and leaving — their jobs, having a solid employee retention strategy is more important than ever. And as companies are figuring out how to retain top talent, one question many are grappling with is this: When it comes to retention, does pay matter?

The answer is: It does. According to Lattice’s SOPS report, compensation is the number one driver of employee turnover, with over half (55%) of employees leaving for jobs with higher compensation.

If you want to keep your employees engaged with their jobs, competitive compensation needs to be a priority. Here’s how to approach compensation in a way that improves employee retention and helps you keep top talent at your company.

5 Compensation Best Practices to Drive Retention

1. Do your research.

When it comes to compensation, you can’t just offer employees what you think is competitive. In order to ensure that their compensation package actually is competitive, you need to do your research.

“Companies shouldn’t rely on gut feeling when it comes to pay,” cautioned Gregory Pontrelli, President, CEO, and Chief People Strategist of HR management consultancy Lausanne Business Solutions. “It’s key that [organizations] gather wage statistics to ensure their compensation is within a competitive range.”

There are a variety of ways to research compensation, starting with a more broad approach. For example, BLS’s website allows you to search wage data by area and occupation, and independent resources like PayScale crowdsource salary data, which can help give you a general idea of the average salary for different positions.

You want to have a broad understanding of what level of compensation will be competitive, but you also want a more specific view of what your competitors are paying. “Having competitive pay compared to other companies is important,” stressed Pontrelli.

Resources like Glassdoor, which allows former and current employees to anonymously post their salaries, can help you figure out what kind of compensation packages your competitors are offering — information you can use to ensure that your compensation packages are competitive.

2. Enforce pay parity within your organization.

If you want to retain employees, it’s important to ensure that their compensation is comparable to that offered at other companies, but it’s just as (if not more!) important to make sure their pay is comparable with their peers within your organization. “Ensuring that there is relatively uniform pay among employees in the same role is key [to employee retention],” said Pontrelli. 

“When an employee discovers that there is a pay disparity with a colleague in the same or similar role, they feel undervalued,” he continued. “For some employees, this means lost trust in the employer. For other employees, it triggers a sense of injustice — resulting in anger and animosity toward the employer.” Either way, the employee is going to be frustrated and unhappy, which could lead them to leave their role and your organization.

To remedy this — or prevent it from happening in the first place — conduct a pay equity audit (PEA) by reviewing your current pay structure and looking for any pay disparities among employees in similar roles and at similar seniority levels. While employees don’t need to have the exact same salaries (for example, an HR manager who’s been with your company for five years might make more than an HR manager who just went through employee onboarding six months ago), compensation should fall in the same range. And if it doesn’t, make the necessary changes. 

3. Think comprehensively about compensation.

Often, companies take a narrow view on compensation, focusing strictly on salaries or wages. But while your employees’ pay rates are, of course, an important part of their compensation package, they’re not the only part. In order to compensate your employees in a way that keeps them with your company, you need to think about compensation in more broad terms.

“Don’t assume they need just cash,” said ​​Kathleen Quinn Votaw, CEO of strategic recruiting and human capital consulting firm TalenTrust and author of Dare to Care in the Workplace: A Guide to the New Way We Work. “[Think about] what else might motivate them from a compensation perspective.”

In addition to looking at wages — and raising them when necessary — look at your overall compensation package. Are you offering your employees a competitive benefits package? What about paid time off (PTO)? Do they have stock options or performance-based bonus opportunities?  

Compensation is about more than wages. And if you want to leverage compensation to improve employee retention, you need to look at all the elements of your employee compensation structure, and make changes and improvements as necessary.

4. Incentivize your employees to stay with your company.

Compensation plays a major role in an employee’s decision to stay at — or leave — your company. To directly influence that decision, you can use compensation to your advantage and reward employees for staying with your organization. “Tenure-based retention bonuses are a solid tool for incentivizing employees to stay,” said Pontrelli.

Consider giving bonuses or additional compensation to employees when they hit certain milestones with your company, like one year or five years. Knowing that staying with the company means additional compensation can make your team feel more committed to their roles and less likely to leave your organization, improving your overall employee retention rate in the process.

5. Focus on pay — but not at the expense of other employee retention drivers.

When it comes to employee retention, compensation is arguably the most important factor at play. But it’s not the only factor. “Employers must recognize that compensation is just a [single] component of why people stay,” said Quinn Votaw. 

To improve employee retention, you need to address compensation, but you also need to address other elements that can impact employees’ decisions to leave an organization. Some other factors you’ll want to keep in mind when making efforts to improve employee retention include:

  • Flexibility: When COVID hit, and many companies were forced to shift to remote operations, it proved that a lot of jobs can be done remotely. In the wake of that realization, the ability to work from home, at least some of the time, is a must for many employees. To keep top talent within your organization, offer flexibility in how and when they work. For example, if you have a hybrid work environment, you might give your employees the option to choose whether they work from home or in the office. Or, if you have a mostly in-person environment, you might give them the option to work from home one day per week.
  • Wellness: The pandemic has also prompted employees to be more invested in their physical and mental health than ever before. So to keep top talent within your organization, you need to invest in their wellness, too. For instance, you might roll out a large-scale, comprehensive wellness program to support your employees’ health, or implement policies that encourage work-life balance.
  • Culture: If an employee feels like they’re in a toxic work environment, they’re likely to leave, even if they’re compensated well. That’s why prioritizing company culture — and building and maintaining a positive one — is essential. Creating a culture that your employees feel aligns with their values, and where they feel recognized and appreciated, will go a long way in keeping them in their jobs and with your organization.

Compensation plays a major role in employee retention. So it’s critical to do the research and work — both internally and externally — to ensure that your employees are competitively compensated. But it’s equally important to take a holistic approach to compensation and consider more than just cold, hard cash. During this period of a record-breaking number of employees quitting their jobs, it’s crucial to cover all the bases and pay your workers fairly while creating an overall positive workplace culture that truly values and appreciates its people in order to attract top talent, keep your current workers engaged, and ensure that they’re all fulfilled, satisfied, and paid enough to remain with your company.