Stubborn inflation is forcing many organisations to pay more for new hires, especially given the shortage of key talent. But there are some ways to attract amazing candidates without breaking the budget, writes Aaron McEwan, vice president, HR Advisory, Gartner.

According to a recent Gartner survey, 57 per cent of CFOs say they’ll increase funding for compensation, which is the second highest spend category for increases after digital technology.

That same inflation is reducing the real income of existing employees. Although many companies are starting to offer one-time bonuses in addition to regular pay adjustments, among other tactics, employees are increasingly underpaid as inflation rises.

Executive leaders must select a compensation strategy that mitigates talent risks while minimising cost pressures.

Existing employees feel the impact of inflation

While you may not want to risk making long-term salary changes when inflation could be lower in a year, employees feel the impact now. A significant number of households are facing financial hardship due to cost of living increases, but only a small number of organisations plan to factor inflation into their strategic budgeting plans. Furthermore, only a fraction intend to increase compensation for all employees.

Organisations that don’t adjust pay to fully match inflation increase the risk of turnover as employees find new job opportunities that pay more. In the third quarter of 2022, employees expected a 10.5 per cent increase on average in total compensation when switching employers — more than enough to cover the increase in inflation.

The compensation gap is widening

As existing employees feel the impact of inflation and organisations compete for talent with salaries, the compensation gap widens, and retained staff are aware of it.

According to a recent Gartner survey, every fifth organisation shares salary ranges for roles. This increased transparency makes it evident that new hires are being paid more, which can breed resentment and disengagement with existing employees. Of managers and non-managers surveyed, 35 per cent report that new hires are making the most money in their new workplaces.

Employers often put unnecessary financial pressure on their organisations to secure new talent. While existing employees understand that switching jobs has a financial advantage, they don’t expect it to be that significant and are quite intolerant of discrepancies in pay.

70 per cent of tenured employees believe that a new hire earning greater than five per cent more than them is “unfair”, while decreased engagement and intent to stay begins at three per cent.

Ten ways to attract good talent without worsening pay inequity

Human resources professionals must focus on retaining top performers and employees in mission-critical roles and prioritise staffing of these positions. Having the right people in the right roles equipped to do the job is key to organisational success.

Here are ten ways to explore how to attract top talent relative to existing employees:

1. Collaborate with the CFO to create budget neutral ways of retaining and attracting talent. This may include sign-on and retention bonuses, spot bonuses for hourly employees, accelerated investment in employee retirement plans, and repriced employee stock purchase options.
2. Place a limit on new hire packages to ensure you’re within a reasonable switching premium range.
3. Offer generous remote or hybrid work arrangements.
4. Extend leave and personal time off policies to give new hires more options for time off and vacations.
5. Differentiate yourself by promoting radical flexibility options, such as working from anywhere or four-day work weeks.
6. Consider home office stipends, share options and other one-off payments to new hires that do not contribute to widening the pay gap.
7. Clearly articulate opportunities for career progression, as well as professional and personal development.
8. Build support options into packages that address capacity and workload issues.
9. Promote the organisation’s ethics and sustainability credentials.
10. Remove unnecessary barriers to entry to attract candidates from unconventional backgrounds and widen your talent pool.

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