The scenario is all too common: your company is competing in a hot market for jobs. Employees you’re hiring this year are making 5%, 10% or even more than those employees you brought on two years ago. The company is in growth mode, and you’ve needed to make strong, competitive salary offers to scale the business.
Unfortunately, this means that your early hires are often left making less than people that are new to the company. This is problematic because some very valuable people in your organization are at risk of leaving for a market-pay job across town.
Early hires are the foundation of your business.
Early hires are incredibly valuable for several key reasons:
- Proprietary domain expertise: They understand the ins and outs of your systems, processes, and customer experience. They know where the issues lie, and they can very quickly circumnavigate problems that would take a new employee significantly longer to overcome. If they’re customer-facing, they have established valuable relationships with VIP customers. They are most likely significantly more productive than recent hires because they have worked out efficiencies in their routines. This applies across pretty much all departments and disciplines, from engineering, to support, and marketing.
- Cultural contributions: Early team members carry with them the lore of the company’s history, and espouse the company’s values and principles. They are beacons for the ideas and beliefs held by the founder and leadership team, and help amplify those concepts throughout the organization.
- Training and Coaching: Veteran employees are often called upon to train new hires within their organizations, and are a critical part of making sure new hires are up-to-speed as quickly as possible, saving the company in time and productivity.
Attrition is expensive. Retention is cheap.
When the market goes up for particular roles or competencies, it can be a difficult decision to correct the salaries of long-time team members. If there are a significant number of affected employees, you can incur a decent amount of expense for your company. However, taking no action puts these employees at risk for attrition. Consider what may be going through the minds of early hires who uncover the differences in pay:
- I’m training new hires while still doing my full-time job, so I should be paid more than the new hires, not less.
- I have unique knowledge that no one else in the organization can match, because I built the systems and processes the company is founded upon.
- I have established great relationships with customers, and invested a lot of equity in those relationships. Customers know and trust me.
- I have gained some great experiences in the past few years that makes me able to easily find another job that pays a lot more.
It’s estimated the cost to the company for the loss of an employee is on average 1.5x their annual salary. This is due to the time it takes to hire their replacement, train the replacement, and build the domain and proprietary competencies of the employee that left.
So if you have 10 employees paid $10,000 less than they should be (say $80k instead of $90k – the replacement cost for that employee), if all 10 leave, you risk losing $1,350,000 in productivity. Adjusting all 10 employees means a $100,000 expense to your business. Losing just one employee would mean a $135,000 loss in productivity. So in the end, the math adds up.