This article originally appeared in the HR Daily Advisor.
So much has been volatile for the American worker since the Great Recession—but one constant has been the size of annual merit increases. For many years, merit increase budgets have continued to hover just under 3%, despite an improving economy, low unemployment, tax reform savings, and fierce competition for talent. Employers face competing cost pressures: increase employee wages to keep workers satisfied and either lose margin or increase prices for customers; or hold wages tight and watch competitors lure away top talent.
New research reveals some organizations have found a way out of the bind. Mercer’s most recent update to the 2018/2019 US Compensation Planning Survey shows that while merit budgets are continuing to hold fairly tight, promotional increase budgets have soared to a new high: a 55% increase over the last 5 years. The survey findings suggest that some employers are embracing a new investment strategy for employee pay—one that involves holding steady on annual wage increases while focusing more dollars on accelerating both the pay and careers of top performers.
Career Development: A Worthy Investment for Employers
A strategy focused on investment in career growth is one that can deliver a return for employers. Mercer’s research consistently shows career growth is one of the most valued elements of the employee experience. A recent Mercer | Sirota study found that satisfaction with career development was the most highly correlated element with many measures of engagement, including motivation, advocacy (i.e., willingness to recommend the organization as a place to work), commitment, and intention to stay.
These findings are further validated by research Mercer does with organizations to look at the key drivers of turnover. For example, analytics from one organization revealed that receiving a promotion within the last year was the leading driver in employee retention—these employees were 10% less likely to leave the organization. Conversely, a pay bump of 10% made a dent of less than 3% in turnover probability.
Employers should proceed with caution, however, to avoid poorly structured promotions backfiring. In another organization, getting promoted signaled a 12% increase in the probability of exiting the organization. Further research into this surprising finding revealed that promotions were associated with significant increases in responsibility, but were granted with small pay raises. Promoted employees actually felt devalued, causing them to look outside the organization for other opportunities.
What is the best way to invest in career growth? Here are four actions to consider:
- Reexamine promotional policies. Many organizations place arbitrary caps on promotional awards (such as 10%), rather than letting the market be the guide for the increase. Mercer’s compensation surveys typically show a differentiation between career levels of 15% to 20% or more; while average promotional awards are only 7.8%. In a competitive labor market, an “empty” promotion that is not backed by competitive pay is a dangerous endeavor—employees may look outside to validate their pay and the new title will make them more marketable externally. Organizations should use market data to their advantage to ensure they are providing a competitive promotional offer, just as they would to an external candidate.
- Analyze the experience of high performer/high potential employees. Organizations should use data to form a comprehensive view of their high performer and/or high potential employees. Look at their career velocity (how quickly they have ascended through the organization), what development opportunities they have been given, and their rate of pay growth. Does the result paint a picture of a premium experience? If not, consult with leaders on how to partner to develop an action plan for enhanced career—and pay—growth.
- Consider lateral as well as vertical moves. For some employees, the desire for career movement is not about advancement or pay growth, but an opportunity to do something different. These career changes not only reenergize and engage the employee, but also spur innovation by bringing more diverse backgrounds together on teams. High performing tech companies have been deploying this strategy to the advantage of both the business and the employee. Organizations should explore initiatives to enhance internal mobility and create shared talent pools across the organization.
- Invest in a career framework. If all of the above feel daunting, consider investing in a career framework as the foundation for advancing career growth. Career frameworks are an enabler to provide greater clarity and transparency to career paths within the organization. They can be brought to life digitally so employees can curate a career path aligned with their skills and capabilities as well as personal ambitions.
Invest in Career Growth to Build a Workforce for the Future
In today’s hot labor market, employees have more options where to work and competitors are willing to pay them a premium to join the company. In July, 2018, job postings and quit rates reached 17-year highs. With 9 out of 10 organizations expecting stiffer competition for talent ahead, it is going to get increasingly heated for employers. The pressure is on, and with significant investments in compensation off the table with tight merit budgets, focusing on investments in career is one way to deliver a more compelling employee experience and yield a return on your investment.