What is the salary level at which companies need to operate?

Posted by | February 8, 2014 | Career, Workplace

salary

How much salaries should companies pay – the answer to this question appears to be rather simple and straight forward. The quality of people is directly proportional to the money you pay them. Therefore, if you want a great work force, you need to pay them “Best in the Market” salaries.

Why ?

Well –  It isn’t difficult to see why. Other than the basic physiological needs like eating and drinking, which are important to live, money helps us meet most of our other basic needs. Unless these needs are satisfied, we cannot appreciate things like job satisfaction, respect, self esteem, achievement etc. Therefore, employees can appreciate things like great work environment (and other intangibles) only after their salary needs have been satisfactorily met.  So if you aren’t paying a top salary, there is no point bothering with work life balance and team building.

This approach has many benefits. Companies whose salaries aren’t competitive constantly live under the fear, that their best employees will leave them for meatier salary packages elsewhere.   Any HR Professional would agree that this has a greater impact on the retention level of a company.  The cost of replacement and the opportunity cost of lost productivity are often higher than the retention costs.

Salaries need to be high but how high is high enough?

Should companies be no 1 when it comes to salaries so that they have the absolute best people and their employees can never leave for more money?

No. It doesn’t quite work like that.

After a point, once all basic needs have been met, people want other things in life. They want respect, self esteem, job satisfaction. Beyond this cut-off point more money doesn’t help. You need to start working on the work environment part.

If the gap between your salary levels and the top paymasters isn’t huge, then you don’t have to worry about employees leaving. The cost of relocating and leaving the comfort of your existing job isn’t compensated by a small salary increase. It isn’t worth it.

Moreover, not being no1 in paying salaries puts pressure on you to work on the great work environment part. Being the no1 makes your life very easy – your employees get out priced out of the job market because of their salaries and have nowhere to go.

Not having the comfort of being no1 doesn’t make you complacent and you work towards ensuring that the entire hierarchy of a person’s needs  are satisfied for your employees. Once you can do that nobody can touch your employees and everyone wants to work for you.

So what is the salary level at which companies need to operate?

This can be figured out by tracking salary levels of different companies against their attrition levels. For this exercise you need to include companies which are in your industry as well as other industries which are the most common exit destinations for people working in your industry. As the salaries increase, the attrition levels will come down. At some stage, there will an inflection point at which the drop in attrition will be very steep. This is the salary range at which a company should ideally operate.

This exercise should be carried out for different functions and levels within the organization.

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