To Stay Or To Go?

Human beings are, naturally, attracted to shiny and new. But could breaking this structural component to turnover be the key to improving retention at companies?

Human beings are naturally drawn to the shiny and new. Whether it's the latest gadget, a fresh opportunity, or an enticing job offer, the allure of novelty is hard to resist. As human beings, this attraction to the new plays out on both sides of the hiring equation, affecting both candidates and hiring managers.

In my role at Daggerfinn, I frequently discuss retention and turnover with HR leaders and executives. Just this week, an HR leader at a $2.5 billion North American organization highlighted their turnover challenges and the growing skill gap between longer-tenured employees and younger professionals. This company, despite having more resources than many other organizations, still struggles with these issues.

This tendency towards novelty is particularly stark in compensation, where job switchers often receive more substantial salary increases compared to their peers who stay with the same company (job stayers vs job switchers).

As we’ll explore in this newsletter, I feel that there is a structural component to turnover in the US economy that is catalyzed by our tendency to be drawn to shiny and new.

This raises an intriguing question: could addressing this phenomenon be the key to improving retention and building a lasting employer brand?

The Lure of the New

Employees who switch jobs often receive significant salary bumps over job stayers, driven by several factors. When a company is looking to fill a position, especially one that is critical or requires specialized skills, they are often willing to offer a higher salary to attract the best candidates. This market dynamic creates an environment where job switchers can capitalize on the demand for their skills, resulting in more substantial pay increases.

Job switchers often receive salaries that better reflect their current market value. Employers seeking new talent must offer competitive compensation, especially for hard-to-find skills or experience. Additionally, job switchers typically have stronger negotiating power. With multiple offers, they can secure higher pay packages, whereas employees who stay with their current employers may lack the same leverage.

Many companies have structured annual raise policies based on percentage increases from the current salary. These policies, designed to maintain internal equity, often lead to smaller raises for stayers compared to the significant jumps seen with job switchers. Employers sometimes view the cost of hiring new talent as an investment, while the cost of retaining existing employees is seen through the lens of incremental raises and bonuses.

Raises for staying employees are often tied to internal performance metrics and budget constraints, which might not align with broader market trends. New hires are often perceived as bringing fresh skills and perspectives, which can be overvalued compared to the steady contributions of long-term employees. Moreover, companies desperate to fill critical roles may offer higher salaries to attract candidates quickly.

Analyzing the Chart

The provided chart highlights the historical growth in wages for job switchers versus stayers from 2001 to 2024. It clearly shows that job switchers consistently receive higher wage increases compared to those who stay with their current employers. This trend has persisted through various economic cycles, including recessions and periods of growth.

During economic downturns, such as the 2008 financial crisis, the wage growth for both job switchers and stayers plummeted, but switchers still maintained a slight edge. This edge became more pronounced during recovery periods, where the demand for skilled labor increased, and companies competed more aggressively to attract talent.

In recent years, particularly from 2020 onwards, the disparity in wage growth has widened significantly. This can be attributed to the post-pandemic labor market, where companies faced unprecedented challenges in filling roles due to labor shortages and shifting workforce expectations. As a result, the premium paid to job switchers soared, peaking around 2022-2023.

This historical context underscores the resilience of the wage growth disparity between job switchers and stayers and highlights the need for companies to reassess their compensation strategies if they aim to improve retention and build a more loyal workforce.

Flipping the Script

Historically, organizations have often prioritized attracting new talent over retaining current employees. This approach has been driven by the belief that new hires bring fresh skills and perspectives, essential for innovation and growth. However, the historical wage data for job switchers versus stayers, spanning from 2001 to 2024, indicates a persistent trend: job switchers consistently enjoy higher wage increases compared to those who remain with their current employers.

This disparity in compensation strategies has contributed to higher turnover rates and a growing skill gap between longer-tenured employees and younger professionals. A study by LinkedIn found that companies with higher retention rates report 33% lower turnover costs and 50% higher employee engagement.

Why Flipping the Script Can Build Better Employer Brands

Conducting regular salary reviews to ensure that current employees' compensation aligns with market rates can help prevent disparities between stayers and new hires. This approach not only enhances satisfaction and retention but also demonstrates a commitment to valuing existing employees as much as new hires. Research from Mercer indicates that employees who feel their pay is competitive are 50% less likely to leave their jobs.

According to a study by PayScale, companies with effective performance-based pay structures see a 15% increase in productivity and a 21% increase in employee morale. This means that implementing a robust performance-based raise system that rewards high-performing employees with significant salary increases can reduce the incentive to switch jobs for better pay.

Offering retention bonuses for key employees or those in high-demand roles provides a financial incentive to stay with the company, rewarding longevity and loyalty. Additionally, providing clear career progression paths and development opportunities can make staying with the company more attractive. When employees see a future for themselves within the organization, they are less inclined to leave for better pay elsewhere. Gallup reports that employees who see a clear path for advancement are 20% more engaged and 34% more likely to stay with their employer.

Beyond salary increases, offering enhanced benefits and perks, such as flexible working arrangements, professional development funds, and wellness programs, can significantly impact employee satisfaction and loyalty. These benefits contribute to a holistic work environment that values employee well-being and growth. According to the Society for Human Resource Management (SHRM), companies with comprehensive benefits packages experience 58% lower turnover rates.

Finally, a Glassdoor survey found that 81% of employees are motivated to work harder when their boss shows appreciation for their work. Therefore, maintaining open and transparent communication about compensation strategies builds trust and fosters a sense of equity among employees. Conducting regular stay interviews to understand what motivates employees and what might cause them to leave can help companies proactively address concerns and retain top talent.

Building a Lasting Employer Brand

By shifting the focus from constantly seeking new talent to valuing and retaining existing employees, organizations can create a more equitable compensation structure and foster a stable, motivated workforce. This approach not only reduces turnover but also strengthens the employer brand, positioning the organization as a desirable place to work for both current and potential employees.

Historically, the tendency to prioritize new hires has been a significant factor in the wage growth disparity between job switchers and stayers. However, by flipping the script and emphasizing retention, organizations can break this cycle and build a lasting employer brand that attracts and retains top talent.

Here’s something I’ll have to mention the next HR executive I speak to: this shift could potentially save companies significant costs associated with turnover, estimated by the Work Institute to be about 33% of an employee's annual salary.

What a weird and wonderful world,