How Your Pay Raise Practices Affect Employee Turnover

In this study, we found that when it come to making pay increase decisions, there are a couple of practices that can hurt employee morale, exacerbate employee turnover, and potentially contribute to a toxic workplace culture.

The first practice is around pay communication — how employers are communicating their decisions back to employees when they choose to say no to a worker’s bid for a raise. Our data found that when someone’s request for a raise is denied, in most cases, they do not believe the rationale provided by their employer. Additionally, the way an employer rationalizes and then communicates their decision makes a big difference in how workers feel about their future within the organization.

The second practice is more subtle, and it may even be an unconscious one. When we looked at the data on who is getting a raise vs. who is being denied, we found that people of color are less likely to receive a raise when they ask, when compared to white men. Given the large size of our sample (over 160,000 workers), this finding indicates that biases are present in performance evaluations and salary increase decisions.

Below, we will elaborate on these findings and show you how you can become fully cognizant of potential problems in your people practices and the steps you can take to reduce voluntary employee turnover.

"Don’t Expect Me to Stick Around Much Longer"

In this study, we asked workers two questions to gauge their level of satisfaction with their employer and their intent to leave. They could choose to say “yes” or “no” to the prompt “In the next 6 months, I plan on actively seeking new jobs outside my current company.” We also prompted them to rate their level of agreement to the prompt “I am extremely satisfied working for my employer”.

The percentage of “highly satisfied” workers are those who agreed or ‘strongly agreed with this statement.

We found that when workers don’t believe the rationale their employer provides for denying a raise, or aren’t provided with any rationale, they are more likely to plan to quit. A full 72 percent of workers who don’t believe in the rationale and 71 percent of workers who were provided no rationale reported that they plan on seeking new jobs outside of their company in the next six months (vs. 50 percent of workers who asked for and received a raise.

As you might expect, when workers are denied raises, their level of satisfaction with their employer takes a hit: Just 29 percent of workers who did not believe the rationale provided and 27 percent of workers who were provided no rationale reported being highly satisfied with their employer (vs. 55 percent of workers who asked for and received a raise).

A Worker Who Hasn’t Asked for a Raise Isn’t Necessarily a Happy One.

For those who have not asked for raises, employee engagement depends on the reason they’re not asking for a raise. Those who are worried about losing their jobs are the least engaged: they report the lowest rates of satisfaction with their workplace, and have the highest rates of saying they intend to leave.

On the other end of the spectrum, those who are already happy with their salary report the highest rate of satisfaction with their workplace (72 percent). Those who said that their employer gave them a raise before they needed to ask also report high satisfaction with their employer (65 percent).

Providing a Credible Rationale Can Improve Employee Engagement

We’ve done this research with the intention of teasing out the connections between pay communication, pay transparency and employee turnover. Our findings suggest that the way an organization communicates information about pay is critically important, especially if it’s negative information. We found that employees tend not to believe their employer’s rationale when their request for a raise is denied. This finding confirms our previous finding on pay perception. In our latest Compensation Best Practices Report, we found that there’s a substantial gap around how employees feel about pay vs. their employers: only 1 in 5 workers reported that they feel fairly paid. Meanwhile, 43 percent of employers (HR professionals) think that their workers feel fairly paid.

In this new study, we learned that when there’s no rationale provided for why a request for a raise is denied, or when employees feel that the provided rationale isn’t authentic, they feel burned. And they’re more likely to start looking for new jobs where their value is recognized and compensated for. However, employees can handle bad news – and even use it as personal motivation to work harder – as long as it’s communicated in a way that feels genuine and reasonable.

We have evidence that transparent communication around pay can move the dial on employee engagement. In our 2017 study on the factors that impact employee engagement, we found that how people feel about the pay process at their workplace – whether they understand the “how” and “why” of pay – ‘has 5 times as much impact on their satisfaction with their employer vs. how much they are paid. When employees have all the information, they feel valued and respected by their organization; feeling valued can trump incremental pay raises.

Instead of feeling like you must choose between giving a talented employee a raise when they ask, or risk losing them all together, there is a middle ground: you can take the time to develop thoughtful communications and share your decision-making process with your employee. If you do this right, and you consistently seek out ways to show employees your appreciation, employees can take “no” for an answer and still choose to commit their energy and talents with your organization.

To learn more about how you can move your organization towards a greater level of pay transparency, check our e-book “The Pay Transparency Spectrum” . If you want to improve your communication plan to employees about compensation, check out our ebook “Communicating Compensation” for guidance.

Keep a Pulse on Your Market and Make Salary Adjustments When the Market Moves

In our study, we saw that those who are already happy with their salary and those who got a raise before they had to ask report the highest rate of satisfaction with their employer (72 percent and 65 percent respectively). These two groups reported higher rates of satisfaction than those who received a raise when they asked (Overall, 55 percent of workers who asked for and received pay raises reported being highly satisfied with their employer).

Employees are happier with their employer when they feel good about their pay. To get to this result, the key is to treat your compensation plan as an ongoing dialogue with your employees vs. one-off, annual events. When your organization keeps a pulse on the market, and you update workers’ salaries as you see movement in the market and communicate the reasons for ‘their salary adjustment, workers are likely to feel like they’re paid fairly and be happy with their salary.

Tackle Unconscious Bias in Your People Practices

Our research found that holding all other factors constant, people of color (both male and female) are less likely to receive raises when they ask versus white men. Given the significant size of our sample (over 160,000 workers), this finding indicates that biases are present in performance evaluations and salary increase decisions.

Unconscious biases are the automatic, mental shortcuts we use to process information and make decisions quickly. We all have them. But if left unchecked, they can harm us at the organizational level. Unconscious bias can cause managers to dismiss great ideas, undermine individual potential, and even create a toxic work environment for their colleagues.

To ensure that all employees have equal opportunities to advance within your organization, it is important to become conscious of the biases in your people practices and take action to mitigate their effects on your decisions.

Re-Evaluate Your Performance Assessment Practices

When it comes to rating employees, managers are often unaware that they’re making subjective decisions. A report referenced in Harvard Business Review shows that on average, 61 percent of a manager’s rating of an employee is reflective of the manager’s experiences and attitudes instead of an accurate assessment of the employer’s actual performance. Yet, a manager’s rating is often the primary metric for assessing performance. Unless you take steps to reduce unconscious bias, you run the risk of developing unfair and possibly discriminatory compensation differences in your organization.

Make sure that your managers use objective, standardized criteria to evaluate the performance of their direct reports. Instead of asking managers to define abstract terms and apply them to the employee through the lens of their biases, focus on questions that deal directly with the manager’s experiences.

Here are some examples of questions:

If [employee] left the company, what would I do?

What are the top things [employee] does well?

What are the ways in which [employee] can improve?

Furthermore, getting a 360 degree view of the employee’s performance by seeking input from multiple perspectives can help ensure that promotion decisions aren’t skewed by the opinion of a single manager.

Go Through Unconscious Bias Training

A few well-known companies including Google and Starbucks are now several years into their unbiasing journey. Google has recently launched a new site called re:Work featuring a collection of practices, research and ideas from Google and others on how to remove unconscious bias from an organization. Unbiasing is a journey that involves education, measurement, accountability and more. ‘According Google’s experience, unbiasing comes down to taking five actions:

1. Raise awareness about unconscious bias. Train all employees.

2. Hold everyone accountable: Create a culture where employees hold each other accountable when they see instances of biases.

3. Gather data and measure decisions.

4. Evaluate subtle messages that may impact whether certain types of people feel included or excluded.

5. Use consistent structure and clear criteria when making decisions (like evaluating employee performance).

You can visit their website re:Work to get more details and specific tools to implement an unbiasing program in your organization.