Talent War - Loyalty tax is 2023's biggest employee retention risk

Ashley Regan
By Ashley Regan | 27 January 2023
Chris Liverani via Unsplash

High salary offers made to new hires in 2022 are fuelling pay equity concerns for employees who stayed loyal to their company during labour shortages.

According to Hays, this so-called loyalty tax could be 2023’s top employee retention risk. Some newcomers were offered $20,000 above advertised pay, industry insighters told AdNews.

Historically Australian research suggests that those switching jobs often typically experience higher wage growth. As a result, those sticking with their employers are paying a "loyalty tax" as the company is unable to increase their pay as much as the new starters.

Nick Deligiannis, managing director of Hays in Australia and New Zealand. “For skills in highest demand, employers offered a salary increase up to CPI to secure a candidate.

"This exceeded average salary increases for existing staff, financially penalising loyal employees who are acutely aware of the monetary benefit of changing jobs.”

Hays also notes a small increase in the number of employers offering a sign-on bonus.

According to a LinkedIn poll, Hays ran in late 2022, 8% of 18,045 professionals surveyed said they’d received a starting bonus in the past six months.

Tips for employees: Ask for a pay rise

If you suspect your salary is lower than a new starter’s pay, Hays suggests you:

Research typical salaries: Consult salary guides and job advertisements for similar roles to compare your pay. Try to remain objective. For instance, does the new hire possess different expertise to you? If so, research salaries for the most accurate skills.

Collate your achievements: Gather examples of your recent work that exceed expectations, additional duties undertaken and achievements you’re proud of. The aim here is to present clear evidence of your value.

Meet with your boss: Book a meeting with your manager to explain your concerns. Mention that you feel underpaid and present your research and achievements. Then state how much you believe your efforts are worth. Ask if your boss can audit your salary externally and internally and review your pay.

Have a reserve standpoint: Pay discrepancies can occur when a new employee negotiates a higher starting salary. If your employer can’t increase your salary at this point, use your own negotiation skills to improve your non-financial benefits. For instance, additional annual leave, a promotional pathway or upskilling could help close the gap.

Tips for employers: Revise pay inequalities

Any pay discrepancy between new and tenured employees can impact employee engagement, productivity and turnover – unless you address it quickly. Hays suggests you:

Benchmark salaries: Compare external and new starter salaries with all employees’ wages. Are they consistent? If any salaries have fallen out of sync with market trends and new starters, can you offer an immediate raise? If not, what else can you offer to bridge the gap to retain your best talent?

Add a buffer to the salary budget: Salary budgets are expected to increase by around 3% in 2023. If possible, factor additional salary adjustments into your budget to ensure your salaries remain fair for all to retain your top performers.

Be transparent: Can you publicly disclose the salary when recruiting for a new role? If not, ensure the starting salary is justifiable in the context of similar positions within the team, and share the data, formula or rationale used to calculate pay levels so employees understand your approach.

Consider non-financial benefits: If your budget doesn’t allow you to increase salaries for tenured staff, consider what else you can offer to reward their loyalty. For instance, can you provide them with additional annual leave, more flexibility or time for upskilling?

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