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.
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.
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.