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October 26, 2007
Expert: Want to Keep Good People? Raise Pay Faster

By Bob Brady
BLR Founder and CEO

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When new employees come on board, employers invest in training them. Sometimes the training is formal. More often it is in the form of reduced output as new people come up to speed. As they learn, their value increases quickly when their output reaches that of an experienced worker. Unless pay increases follow the same curve, you risk losing your investment, says Barry L. Brown of Effective Resources, Inc.

Speaking at HR Southwest's annual conference this week in Fort Worth, Texas, Brown showed several graphs that approximated a "learning curve." It is steep and then flat for simple jobs such as, say, window washers. It is slightly less steep, then continues slowly upwards at a much slower pace for more complex jobs. Few jobs, in Brown's view, require more than two years for employees to reach median performance levels. (Though some require a lot more training than that to reach minimal qualification standards.)

Behind the Curve?

To judge where you are relative to the curve, Brown says, two critical questions have to be answered.

  1. "How long does it take for a qualified person to become really good in a given job?"
  2. "How long does it take to move from the hiring rate to the midpoint of your pay grade (or market)?"

If there is a difference of more than six months between those questions, you've probably got high turnover, says Brown.

His reasoning is that the employee's pay has not kept up with their skill level. In a tight job market, many employees will quickly see that the grass is greener on the other side of the industrial park.

Auditing Your Process

In his view, the midpoint of a pay grade should be where an experienced, fully productive employee should be. If your pay system gets new employees to that level at too slow a pace, you face the danger of losing them. He proposed a simple formula for auditing your any job. First, find the percentage between the entry rate and midpoint. Then, divide the answer by the number of years required to achieve competency. (For example, if the minimum is $10/hr, the midpoint $12.50, and it takes 3 years, it takes raises of about 8% per year to reach the midpoint in three years (not accounting for rate range increases due to cost of living.) If a beginner cannot get raises in that range, it will take longer to reach the midpoint.

Turnover

Few companies are that liberal with their pay increases, but it may be a case of being penny wise and pound foolish. SHRM estimates that turnover costs 1.5 times annual salary, when all soft costs are considered. Brown says that hard costs of recruitment, etc., are much lower, but still higher than many people believe. "To be conservative, let's use just $10,000. If you have 10 terms, that's $100,000. At current margins, what does $100,000 represent in sales?" he asked.

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