Compensation and Benefits: The Truth About Overpaying vs Underpaying Staff

<div class="grey-callout"><h2>Key Takeaways</h2><ul>
<li>Attractive salaries: Offering competitive salaries is crucial for attracting top talent.</li>
<li>Comprehensive benefits: Include healthcare, pensions, and wellness programs to enhance employee satisfaction.</li>
<li>Flexible working: Consider options like remote or hybrid work, or flexible hours.</li>
<li>Tailored packages: Customise benefits to match different employee needs and preferences.</li>
<li>Regular reviews: Periodically reassess and adjust compensation and benefits to stay competitive and meet employee expectations.</li>
</ul></div>

Decide How Much to Pay

If I go to a jeweller to find a diamond necklace for £30 and don’t find one, that doesn’t mean there is a diamond necklace shortage. The amount I’m willing to pay is out of touch with reality. Similarly, when you advertise a job and know you want to attract Great Performers, you need to ensure your proposed salary is in touch with reality.

To judge present salary levels, search a few job sites for similar jobs in your location, ensuring you’ve looked at a large enough sample to make an informed judgement. This assessment will give you a rough guide as to what to pay.

You also need to bear in mind:

• Unattractive companies and locations: You may need to “overpay” for staff willing to risk joining a start-up, an organisation in a turnaround situation, a declining industry, or an unattractive location.
• Location disparities: I often have customers who recruit staff outside major cities and away from a “commuter belt” because it is cheaper. There will probably be similar salary disparities where you are.
• Competition: Some competitors have deep pockets and pay too much, forcing you to respond.
• Demand: Roles in high demand can command significant premiums.
• Sector disparities: Some sectors have huge disparities. For example, the finance sector ranges from City traders earning millions, to staff in High Street bank branches offered modest salaries.
• Experience: Trainees are paid less to reflect the time you’ll invest in developing their potential.

‍

Uncompetitive Salaries

When conducting your research, you may think, “I can’t afford a higher salary!” But Great Performers pay for themselves if they work on value adding tasks and are managed well.

You might also realise, “We’re underpaying our current staff!” Your employees probably already know this. Some won’t mind because money isn’t the only reason they work for you. But others might already be looking for a new job that offers a better salary. A politically tricky argument is that your existing staff may not be Great Performers, so you must pay more and be clear about that upfront. Regardless, I’d recommend you pay them a competitive salary so you’re not about to recruit their replacement!

Overall, an uncompetitive salary means it takes longer to fill a job, and you must compromise on the quality of the candidate. That doesn’t necessarily mean you should recruit a Poor Performer, but you won’t get everything you want. Even if you get lucky and recruit a Good Performer, there is a higher chance they will be a flight risk and move elsewhere.

One option is to recruit hybrid workers who often value work-life balance more than money. Another is to recruit remote workers who have no commuting costs and a lower cost of living which is reflected in their salary requirements.

It is also worth considering what scenarios you might increase the salary for. For example:

• What are the consequences if you don’t fill a job within the next 60 days? Remember, the only reason you should recruit is to add value customers are willing to pay for, so there is a lost opportunity cost.
• What if a candidate comes from a competitor? They could bring a lot of insights and get up to speed quicker.

‍

<span class="grey-callout"><span class="text-color-purple">Warning:</span> There are risks of overpaying. Your organisation will become less profitable and resilient to downturns, and Poor Performers will find nowhere else that can afford them.</span>

‍

<span class="purple-callout"><p>Just to mention – I'm available to offer advice and practical help with your recruitment (get your free consultation).</p><p>For example, I'll advertise a job on top UK job sites for just £199.</p><p>My best-selling talent acquisition book is another resource you'll find helpful.</p></span>

‍

Fair Pay is Linked to the Contribution Made

While employers should treat everyone fairly, this does not necessarily mean paying everyone equally. True fairness is when you pay an employee for the contribution they make. Therefore, pay differences should exist because employees doing the same job don’t necessarily achieve the same outcome. If a warehouse picker achieves 50% more than their colleagues, is it fair for them to be paid the same? If you were that Great Performer, wouldn’t you leave? You may think, “Does that warehouse picker need a bonus, or are they happier with a reliable job and a good basic salary?” I find that Great Performers typically want both.

But don’t misinterpret my advice and start offering a low base salary topped up with a bonus that equates to an overall “competitive salary”. Some companies I’ve worked with have a compensation philosophy with low pay and high upsides, but I rarely see them consistently recruit and retain good employees. For example, I worked with a property investment company offering £30,000 basic salaries and £100,000 on target earnings; they struggled to attract suitable candidates because the low basic wage didn’t inspire confidence.

‍

Commission-only doesn’t attract suitable candidates

I don’t want you to take my advice too far and offer commission-only roles. Incentivising in this way can lead to some disturbing behaviours and outcomes:

• Short-term focus: Employees focus on a sale now, often at all costs to long-term success, potentially harming the business.
• Teamwork challenges: Commission-only jobs create a highly competitive and often toxic environment, which might undermine teamwork.
• High staff turnover: Due to the pressure and potential for low earnings, which can be costly and disruptive.
• Short sales cycles: Commission-only is usually only possible for products/services with a quick sales cycle because employees can’t necessarily afford to wait for long sales cycles to conclude.
• It is almost impossible to attract applicants: Very few people can afford to pay their bills with such an unpredictable income. You spend more time and money recruiting them, often negating expected benefits.

‍

Avoid sales jobs with no commission

Sales jobs typically involve a reasonable basic salary and a commission that makes up their on-target-earnings (OTE). This is the norm; it is what money motivated salespeople expect.

Some interesting academic books, such as Kohn (1999), counterintuitively suggest scrapping incentive plans and focusing on celebrating achievement. Some hiring managers have taken this to mean that they don’t offer commission but give a simple salary regardless of sales performance. Unfortunately, I’ve found that not offering commission rarely attracts Great Performers, and you spend more time trying to convince them they’d be better off with a consistent “average” salary.

Despite many hiring manager’s best intentions, I recommend not reinventing the wheel. Stick to what salespeople expect and want: a good basic salary and commission.

‍

The National Minimum Wage is not a guide

The National Minimum Wage is only designed to reduce low pay. It doesn’t consider industry sectors, geographical locations, or market dynamics. Therefore, don’t necessarily use it as a benchmark for what you should pay (or try to get away with), especially if you want to attract Great Performers.

‍

Make benefits a real benefit!

In the grand scheme of things, benefits (such as health care and life insurance) have less perceived value than a salary, especially during a cost-of-living crisis. Invariably, if an employee can purchase it with their own money, they’d rather have it in their pocket and purchase it if they want it.

Because most employers offer legal minimum holiday allowances and pensions, they are no longer competitive differentiators.

The most valuable benefits include free car parking and remote/hybrid working.

“Benefits” such as dressing casually, mindfulness apps, or free food and drink are more akin to cultural statements. Demonstrate these later in the recruitment process at the Work Culture Assessment (see chapter 13 of my recruitment book). 

‍

Additional Resources

• Recruiting Book; The Secrets of Great Recruitment: How to Recruit Great Employees.
• Downloadable PDF guide; Paying for Performance: Deciding Salaries to Attract & Retain Top Talent.
• Article; How Much to Pay Employees: Setting the Right Compensation to Recruit Great Staff.
• Kohn, A. (1999). Punished by Rewards: Twenty-Fifth Anniversary Edition: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes