Employee Compensation Perception: How it Affects Retention


The HR industry has been rapidly changing as the trends of the workforce indicate employees and job seekers need to be engaged, desire cultural fit, excel on collaborative teams, demand transparency from employers, and a plethora of other insights. What’s even more shocking is that much of today’s workforce is willing to accept less employee compensation, within reason, in exchange for a fulfilling career. 

HR professionals have now been focusing their efforts on recruiting and retaining employees based on the assumption that there is more value in providing them with non-monetary incentives. Unfortunately, however, the perception employees have regarding their compensation can have more influence on their decision to stay at their job than HR professionals might think.

Employee Compensation Misperception

To some extent, pay misperceptions are not entirely surprising, but recent research indicates the problem is bigger than experts expected. A recent study done by PayScale reveals that a large percentage of employees don’t know how their pay compares to the market rate. The research found:

  • 79% of employees paid above market rate believe they’re paid either at or below market rate
  • 64% of employees paid at market rate believe they’re paid below it
  • Surprisingly, out of those paid below market rate, 17% believe they’re paid at or above the market rate

Tweet This: 79% of employees paid above market rate believe they’re at or below market rate.

Research done by CEB indicates that there’s not just discrepancy in pay perceptions, but there is general disapproval of the characteristics for which people’s pay is determined. In fact, 77% of the employees surveyed felt this way and 54% felt they were paid unfairly.

Not only does this show a lack of communication and transparency from employers about compensation, but it shows that employees aren’t educating themselves on the market rate. The trouble in that is that employers may not even be aware of the misperception and dissatisfaction occurring and, unfortunately, these issues can have negative consequences.

How It Affects Retention

Poor employee pay perceptions have the potential to deteriorate performance and increase turnover. In fact, CEB’s research showed that employees with negative pay perceptions showed 14% less effort on the job and, consequently, caused a reduction in the number of high-performing employees by 7%.

Tweet This: Employees with negative pay perceptions show 14% less effort at work.

During their research, PayScale found that 60% of employees who believed they were underpaid said they intended to leave their job. Pay is, after all, the reason we all work for a living, but if salary isn’t communicated to employees in a way that justifies the number, they’re going to continue to feel they’re being paid unfairly. It’s less about the salary itself and more about the value implied by it. Employers should take proactive steps to measure the feelings their workforce has about the market rate for compensation. Once they can gauge this, they can start developing plans for how to fix any perception problems that exist.

How to Fix It

For some employers, it boils down to a simple need for better delivery. Managers should be communicating very transparently why an employee is being compensated a certain amount. If the person is concerned that what they make is unfair, outline how closely their pay resembles the market rate. Have relevant and constructive reasons why this person is or isn’t getting paid more. Having transparent conversations about compensation has actually been shown to alleviate low pay.

BenefitsFocus offers these six suggestions to communicating compensation and benefits to employees:

  • Describe the benefits in a way that relates it to the entire organization, regardless of job level. This keeps it in perspective that everyone in the company gets the same benefits.
  • Describe benefits in terms of dollar value. If employees are too focused on salary, they may forget to take into account the value in the benefits they receive.
  • Enlighten employees with intangible benefits of the workplace. For example, flexible schedules, corporate wellness, and career development are difficult to monetize, but very valuable to attracting and retaining talent.
  • Customize the conversation based on the demographic. For example, retirement planning might be more important to an older employee than it is to a younger employee.
  • Provide a detailed outline of benefits on the company website. This can be very helpful when recruiting or adding new hires to the team because it gives them something to refer to if they’re unsure about what benefits they receive. It also gives employers the opportunity to provide information about how the benefits they offer follow the company mission and culture.
  • Get in the habit of providing a summary of benefits frequently. Providing employee benefits statements reminds employees that they don’t just get a paycheck, they get valuable benefits too. It’s also helpful to send out benefits statements during times of open enrollment or tax season.

The gap between employee compensation perceptions and reality should be a cause of concern to employers. The research shows these kind of discrepancies have the potential to increase turnover and deteriorate performance.Taking steps to remedy it doesn’t just help employers keep good employees and safeguard performance, but can greatly improve the communication that exists between managers and employees. Don’t wait until you’ve lost all the good ones to make these changes. Act now so you can focus on other pertinent areas of the business.

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