Do Tight Merit Budgets Punish Loyalty in Top Performers?

Recently, I spoke with a group of cooperative CEOs about today’s volatile labor market and shifting compensation trends in merit increases and starting salaries. Clearly a hot topic right now!

In the course of the conversation, the question was asked:

“Generally, what is your reaction when a current employee asks for an 8% increase?” 

Consensus in the room indicated the initial reaction would not be positive and that 8% would be a big (maybe unreasonable) increase for a base salary.

Then the question was asked:

“If that same employee resigns and you recruit someone who you think is a strong hire, and you have to pay 8% more to get them to join your organization - would you be ok with that?”

While recognizing the contradiction in their responses, most of the CEOs indicated they would be okay paying 8% more for a new hire. 

Do You Pay for Existing Talent or Buy New Talent?

As a compensation professional and leader, this apparent contradiction caused me to pause as questions popped into my head.

• Why is it we find it easier to pay more for new, untested talent than for a current solid performer?  
• Are we overly optimistic there is something better out there than the talent we have?
• Are we failing to set clear performance expectations and then are disappointed in poor performance and unwilling to pay more?
• Are we complaining about employees (particularly young employees) lacking loyalty, when, in fact, we pay individuals who change employers more than individuals who stay with our organization?
• Does our approach to giving salary increases put our current employees at a disadvantage over new hires?

I don’t have all the answers (it’d be a lot easier if I did), but I think the questions are worth asking when pay considerations occur.

What are your thoughts?