Are pay rises the best staff retention tool?

As a result of the cost-of-the-living crisis and to counteract the Great Resignation movement, in recent months, some employers have been giving their staff one-off payments and pay rises. In fact, research published in July by people analytics business Visier found that 17% of UK employees said they planned to hand in their notice at work to take on a role offering a higher salary, while 94% agreed that household incomes cannot keep up with the cost-of-living crisis. But how effective are pay rises in retaining staff?

Pay rises as a retention tool

Pay is often the simplest basis on which employers can attract and retain talent. However, being reliant on pay for retaining great employees is not always enough, given that there will always be another employer which has deeper pockets.

Due to the increased cost of living, pay has become the number one focus for many employees, says Sarah Steel, director of Better with Money and head of financial wellbeing of Cushon. Although in itself it does not always motivate, if it is wrong it can demotivate, she adds.

“To keep pay in a neutral position, a fair market remuneration strategy is the absolute minimum to not only retain but also attract employees and keep them motivated,” she explains. “A pay rise might help solve the immediate problem of employees struggling financially, but it has a short-term motivating effect which soon wears off as they become used to more money. I would argue that pay increases as a response to the rising cost of living aren’t the answer on their own, and they certainly aren’t going add much to motivation and retention.”

An employer’s compensation policy needs to be fair, equitable and as transparent as possible. Whether it helps to retain or motivate staff, however, depends on what else is on offer to them.

Robert Hicks, group HR director at Reward Gateway, says: “By itself, pay can’t deliver on what really motivates, engages and retains employees. Pay might get top talent in the door, but without regular recognition, appreciation, a sense of purpose behind their work, and opportunities for personal growth, they won’t stay due to pay alone.”

Pay has to be right for the job, level and industry. If it is not, it can push people to start looking for a new role. Regular increases could be useful, because when these are timely and properly aligned with career opportunity and growth, they can help employees feel engaged and motivated.

“Employees are essentially letting their employers know that their time, their need for flexibility and their desire for purpose at work are highly valuable,” adds Hicks.

Different retention and motivation benefits

While pay rises might help, employees may be looking for much more from their workplace as a reason to stay. Work-life balance initiatives, holiday pay entitlement, bonus arrangements, recognition and reward systems, healthcare benefits, emergency childcare or eldercare support, and a generous pension are all avenues worth exploring.

When considering the impact of the cost-of-living crisis, benefits that can help improve financial wellbeing are also valuable.

Voluntary benefits schemes offering discounts on items such as grocery shopping, transport, appliances and mortgages, or help with financial planning including debt support, and salary sacrifice arrangements to help reduce costs for travel, mobile phones, gym passes and health and dental care may all be valued by employees, says Jonathan Watts-Lay, a director at Wealth at Work.

“Offering financial education and one-to-one guidance can also make a huge difference in helping employees understand their finances, and should cover topics such as how to budget, money saving tips, debt management, and retirement planning,” he says.

Some employers have also adopted wellbeing funds for staff, where employers set aside a fund for their employees to use in a way that best supports their wellbeing, says Adam Mason, global executive vice president at Benefex.

“Gestures and connections with an employee can offer the most strength to any employer and employee relationship and, in turn, longevity,” he explains. “It remains just as relevant in terms of thinking about the importance of some of the more traditional risk and insurance benefits which can offer that protection and comfort to an employees.”

Employers should understand that a salary increase may not alleviate all problems or improve employee motivation and productivity alone. A benefits package that includes a range of financial and non-financial support may be a more effective long-term approach.

Offering the opportunity to make pension contributions via a salary sacrifice arrangment can help to put more money into people’s pockets, says Steel. Meanwhile, pension redirect, where employees can choose to have some of their and the employer’s pension contributions directed into an accessible workplace savings scheme, may also help.

While it is still important to pay at a certain level, organisations need to offer more to keep staff motivated, while also adding value to the overall reward package, Paula Allen, global leader of research and total wellbeing at LifeWorks. “Workplaces that can offer flexible-working options allow employees to cut back on commuting costs, as well as balance factors including after-school childcare responsibilities,” she explains. “This can, in turn, enable a focus on individual wellbeing and mental health.”

A prospective employer’s pay strategy

Employees’ expectations for pay transparency are high, as highlighted with the government launching a pay transparency pilot back in March in order to level up employment opportunities and break down barriers for women. Employees are, therefore, looking to prospective employers for clarity and authenticity around compensation practices and if they deliver on promises for rewarding work, clear values and an inclusive culture.

Rather than just a pay strategy, employers need to establish a total reward strategy that recognises that there is not a one-size-fits-all approach that is right for everyone, says Steel. “This is why flexible benefits have become so popular; rather than a list of benefits that staff may or may not want, they are able to select a package that suits their needs,” she says. “Like most things these days, it’s about a personalised approach.”

Hicks, meanwhile, is of the opinion that the best employers are thinking beyond pay and are looking for creative and flexible options to reward and recognise work all year round. “Especially in today’s challenging economy, employers need to go the extra mile in their pay strategy to augment standard compensation with [benefits], perks and discounts that extend the overall employer monetary value proposition in ways that employees can feel each and every day,” he explains.

Communicate with staff

But, in terms of what is most likely to retain and motivate employees, perhaps the best approach is to ask them what they want, what are they struggling with, what might push them to seek another role and what support they need right now. This can generate conversations that benefit both employers and employees, as well as impacting retention and boosting motivation as workers feel listened to and supported.