Why don't companies give competitive raises to keep their employees?

Question

I've heard it said that the fastest way to increase your salary is to change companies every few years. If this is true, it seems to mean that very few employers regularly give raises that keep up with market values of employees.

It seems rational to me that they would do this proactively.

Suppose a computer programmer gets hired right out of school for $60k. Two years later, she has gained skills and could easily find a job paying $70k.

Shouldn't her current company proactively pay her more than $70k to keep her from wanting to leave?

Considering her value to them:

• She has $70k worth of general skills
• She also has company-specific knowledge and experience worth, say, $20k
• Therefore, she's worth about $90k to them and would be a bargain at $70k

Considering the cost to replace her:

• They'd need to pay $70k to hire a new programmer at the same skill level
• They'd also need to spend a lot of money recruiting and training that person. This article says studies show it would cost about 20% of her annual salary to replace her, and that "very highly paid jobs and those at the senior or executive levels tend to have disproportionately high turnover costs as a percentage of salary (up to 213 percent)".
• Therefore, a raise that keeps her from leaving is a bargain compared with the cost of replacing her.

Is there any good business reason to let her salary fall behind her market value?

Answer 1

Compensation strategy seems like one of the most misunderstood concepts in the workplace. Here are is a bit of background.

1. Most companies have detailed compensation strategies. There is often someone in HR who's job it is to think about this stuff all day long. In most cases, this is not a secret. You can simply go and ask them about it.
2. Most companies try to pay "market value". So they try to pay the same that a different comparable company would be willing to pay. The goal is to make sure that there isn't a strong incentive to leave based on pay.
3. Many companies do actually share salary information!!! This is often done through thrid party clearinghouses, but Microsoft knows very well what Cisco is paying to the typical Software Engineer IV (and vice versa). These data are often referred to as Market Reference Spans.
4. Your compensation has only limited correlation with the value you bring to your company. Your value must be high enough to warrant the overall expense (which is actually a lot higher than your compensation). Other than that it's only "pay her enough to not walk out of the door". Compensation can also vary widely with region. You will get paid less in a low-cost-of-living area even if you do the same job at the same quality. This isn't about fairness.
5. For senior, high-value and critical employees many companies put a some sort of long term incentive in place. This can be stock options, stock grants, staggered bonuses, deferred compensation, etc. The idea is that the employee will get more money "later" which would be forfeit if they bugger out right now. Also known as "golden hand cuffs".
6. In very rare cases, there can be a out-of-policy raise or special compensation for a high-valued or critical employee. HR will be dragging their feet, but I've done that on occasions.
7. All of this is certainly negotiable. If your value is high enough, than the company doesn't want you to walk and you can use that leverage. The easiest way to get a substantial raise is the have the job reclassified or promoted. In your example, the programmer was probably hired as a Software Eng I. If she has gained enough experience, and the complexity of her assignment has gone up accordingly, then she can make an argument for becoming a Software Eng II.
8. Another strong leverage is to walk into your boss's office with a signed offer from a different company in hand. Depending on your value to the company this can result in anything from a hearty hand shake and "good luck in your new job" to your company frantically throwing money and incentives at you.
9. Obviously this depends on how much value you bring to the company "AS PERCEIVED BY YOUR EMPLOYER". Your own opinion in the matter is not particularly relevant. I've been surprised over and over again, how often these perceptions diverge. So key is to have open and honest communication with your manager and actually willing to listen and accept what she has to say.

Now to answer the question directly:

• If she has gained sufficiently more experience and can do more complicated work, than her job classification should be adjusted which would take care of the compensation
• If there is no direct risk of attrition and if she isn't perceived as high value or critical, then there is no reason for the company to pro-actively throw more money at her.

Answer 2

In most of the cases, the goal of a company is make profit.

You're right saying that the cost of letting her go and recruiting a new member may be higher than giving a raise, but that's true in the short term. But what about all that time she was underpaid?

All that saved money is far greater than the overhead cost of a new recruitment.

Another reason could be that the company somehow doesn't see further potential in the employee and doesn't want to keep investing money on her.

Answer 3

As with any big life change, there is a threshold of benefit that needs to be gotten over before the pain of the change starts to look good. This is why people stay in a broken house instead of moving to a less broken one, why companies resist changing out major systems for more supportable ones, and why people stay in jobs they're unhappy with.

In a perfectly mobile workforce, companies have all the incentive in the world to stay with market-rate raises. Only, there is no such thing as a perfectly mobile workforce. Vendor lock-in applies to paychecks as much as it does to supply contracts. This is how employers can 'get away' with not supplying market-rate raises.

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A previous employer of mine had a bit of trouble when they hired me. I was the first new hire in that particular employee class in five years. I got hired at market-rate, as did my new coworkers. Only, my market-rate reflected five years of pay improvements and theirs only reflected standard increments given to all salaried employees.

This got resolved a couple years later when our entire class was increased above what I was being paid. But the fact remains, the only market-rate setting we got was at-hire.

Why did we stay as long as we did?

• The location was fairly remote, so changing jobs to a similar one elsewhere would almost definitely require relocation as well.
• The employer is a traditionally 'sticky' employer (higher-ed).
• The workplace culture was actually pretty nifty.
• The benefits package was really nice, and well above what our market-rate peers were getting.

We started getting attrition when the 2008 recession and associated increase-freeze started being really felt.

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Some employers, notably government though large employers are likely similar, can't offer individualized increases, or make 'reclassification' hard due to overly broad job-classes.

There can be significant variation of skill level within a job-class, which further makes reclassification-for-raises (sometimes called 'promotion') difficult.

Certain skills can command a premium over market-rate (Blackboard Admin vs SharePoint Admin), even though abstract job-duties and experience requirements are the same. For organizations that can't offer individualized compensation packages this is a major problem, this is why you see certain skill-sets hired at a higher job-title than they otherwise would be.

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There is also more to compensation than mere salary. There are a lot of books out there on non-monetary compensation. For an example of how under-paid techies can stay in one spot despite known pay disparity vs. market-rate, take a look at the previous job I listed above. That job was sticky for a variety of reasons.

There is another value that employers know about called the total cost of compensation for a worker. This value includes things that don't show up in the pay-stub, or if they do they're in the negatives column:

• Employer unemployment insurance contribution
• Employer social-security contribution
• Employer retirement plan contribution
• Employer paid health-care costs
• Employer paid insurances
• Employer paid transit benefits

The HR department of the employer I spoke about above passed out a break-down of each employee's TCC. In my case, the bit that didn't show up in my pay-check came to +35% of my salary. When factoring that against the TCC of my market-rate peers I was actually pretty close to market-rate.

Salary isn't everything.

And then there are the other 'intangibles', which are very hard to quantify, but employers try (hard) to foster. These are value adds to the "benefits of working here" column that don't show up on the pay-check. Employers try to exploit this because most people are not solely in it for the money, and is why most job postings have "and we're a great place to work" somewhere in there.

This is where ping-pong tables and beer in the fridge come from, but it is also how well the office works together. An office that works really well together is one that is retentive.

Your hypothetical female programmer may have found herself a workplace free of the microaggressions that so plagued her previous workplaces (internships, OSS work, pickup work during college, etc), which means she'll happily take a 20% pay cut just so she doesn't have to put up with all of that crap. This is a good example of non-monetary compensation,

If employees aren't asking for raises, or new-hires aren't regularly forcing the organization to up their rates of pay, pay can slip below market-rate due to simple inattention. That's a market force too, it's call inertia.

Answer 4

Maybe they don't need her advanced skills

They only rational reason I can think of is that, although she's worth $70k on the market, their business model is such that she's worth less than that to them.

For example:

• They can only earn $65k from the product of her work
• They really only need a junior-level person to, for example, maintain a company web site

Answer 5

Is there any good business reason to let her salary fall behind her market value?

They might want to invest in propaganda instead (this company is the best, we are one happy family, bla bla - you know the type) and hope it will keep people from leaving, even if their salaries are below the market.

Personally, I wouldn't call it a good business reason, but some companies might (at least, until the turnover gets really high)