Boosting wages for new hires? What that means to your current employees

Amid the battle to attract and retain talent—and stay competitive as inflation remains high—many employers are upping the ante for potential hires.

But, a new survey finds, that attention on wooing employees is much to the chagrin of current employees, many of whom are suffering from financial stress as they reel from the soaring cost-of-living and seek help from employers in the form of compensation increases.

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A 2022 survey of more than 635 workers and 650 hiring managers by software firm Capterra finds that companies are increasing pay for new hires: 65% of hiring managers say starting salaries and wages at their organization are higher than usual right now due to inflation and talent shortages. On average, new hire pay is 9% higher than usual.

That focus on new hires is bugging tenured employees: 68% of hiring managers say at least one of their direct reports has asked for a raise or threatened to quit over a pay discrepancy with a new hire in the past 12 months, the survey finds.

Though a focus on competitive pay for new hires “solves one problem—filling important job openings,” says Brian Westfall, principal HR analyst with Capterra, it’s also creating pay discrepancies with tenured employees.

“That’s causing tension. Inflation has already left workers feeling slighted about the reduced purchasing power of their paychecks,” he says. “The fact that new hires are getting higher wages and salaries right now feels like adding insult to injury.”

Indeed, inflation—which increased 9.1% year-over-year in June 2022, hitting a 40-year high—is causing significant financial strain for employees as costs for gas, food, housing, travel, healthcare and other expenses take their toll. As a result, some haven’t been able to save, while others have cut their 401(k) contributions. And overall financial stress is on the rise and driving up mental health issues like anxiety.

While salary increases have been a no-brainer for employers looking to help—63% of executives plan to make compensation adjustments in response to high inflation, according to data from Gartner—salary increases largely fall significantly short of cost-of-living increases. For instance, Willis Towers Watson data finds that companies, on average, are budgeting a 4.1% salary increase for 2023.

Without addressing pay for both tenured employees and new hires, employers often start a vicious cycle that finds employees looking for better-paying opportunities, Westfall says. “Companies are having to pay new hires more, causing pay discrepancies with current employees. Those current employees learn of the discrepancy but don’t always get the raise they want to address it. Finally, those employees quit to go somewhere else that is offering new hires more money—starting the whole conflict all over again.”

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Westfall recommends that HR leaders audit compensation frequently to identify glaring discrepancies between new and existing employees. “You may not be able to increase salaries and fix every discrepancy you find, but hopefully you can close the gap in the worst cases,” he says.

If employers do not have the budget to fix a pay discrepancy, they can consider a couple of other options, including rewarding tenure in other ways, like giving employees more paid time off the longer they’ve been with the organization. HR leaders also can gather data to explain a discrepancy if an employee brings it up, whether it’s a difference in performance, certifications or skill sets, Westfall says.

Lastly, companies can take what he calls the “risky approach”—waiting it out. “The job market is red hot right now, but a looming recession could tip salary negotiations back in employers’ favor.”

However, he says, not doing anything comes with a risk.

“If your company is increasing starting offers to combat inflation and talent shortages, so are your competitors,” Westfall says. “Unless concerns about pay discrepancies are addressed, existing employees are going to eventually figure out they can make more money elsewhere in this labor market.”

For more insights, attend the session “The Job Seeker Experience Is Stil\l Broken — Together, We Can Fix It” with Indeed experts at HRE’s upcoming HR Tech Conference in Las Vegas. Register here.

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Kathryn Mayer
Kathryn Mayer is HRE’s former benefits editor and chair of the Health & Benefits Leadership Conference. She has covered benefits for the better part of a decade, and her stories have won multiple awards, including a Jesse H. Neal Award and honors from the American Society of Business Publication Editors and the National Federation of Press Women. She holds bachelor’s and master’s degrees from the University of Denver.