Human Resources

An Introduction to Hierarchical Pay Raise Strategies

With the unemployment rate hovering at historic lows, companies need to work hard to attract and retain top talent. And while they’ve tried to do this with a number of different incentives—such as greater workplace flexibility, increased healthcare benefits, positive company environments, etc.—salary remains the primary draw for a big chunk of employees.

Hierarchical

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Pay Matters

recent survey by online employment marketplace ZipRecruiter of 50,000 jobseekers found that when asked directly about which form of compensation matters most to them, respondents most frequently answered top-line pay. And 50% of respondents who are actively trying to switch jobs said they would stay in their current jobs for higher pay.

The challenge for many companies, however, is that payroll makes up a huge portion of their operating costs and eats up a large amount of their revenue. By some measures, for the average American company, spending between 20% to 30% of revenue on payroll puts them on fairly good financial footing, other factors aside.

For service industry companies, that number goes up to around 50%. For that latter group of companies, increasing salaries by an average of 3% annually amounts to giving away an additional 1.5% of revenue each year in the form of payroll.

That doesn’t take into account other expenses that may be increasing. Unless a company in such a situation is increasing its revenue by at least that much, it’s going to soon be in financial trouble.

But even a 3% annual increase can seem relatively insignificant to an individual employee and may not be enough to keep employees satisfied and on the job. So what is an employer to do?

Making Hierarchical Moves

One option is to be more hierarchical when it comes to giving out raises. In other words, instead of having an average increase of 3% per employee and keeping the specific percentage for each employee fairly close to that 3% mark across the board, some employees might get a 10% raise, some a 1% or 2% raise, and some no raise at all.

In a follow-up post, we’ll discuss some arguments in favor of a more hierarchical raise structure, and in another post, we’ll discuss some approaches to implementing such an approach.