Why pay rises for your company’s ‘flight risks’ can backfire

The other day I bumped into a friend I had barely seen since he started doing quite an important job at a big bank.

“Hello!” I gushed, eager to hear about life inside a business that, even by investment banking standards, had a knack for making news.

“Oh,” he said. “I’ve left.” He had in fact gone months ago, joining the millions worldwide in a Great Resignation that was supposed to have been a temporary, pandemic blip but has lasted and even deepened.

Figures this month show 4.4mn US workers, or 2.9 per cent of the workforce, quit in April — up from a record-setting 4mn, or 2.8 per cent, in the same month last year.

It is not that different elsewhere. Here in London, it is starting to feel notable to come across someone still doing the same job at the same organisation with the same phone number that they had before Covid.

Looming economic uncertainty may change things but, for the moment, employers in many industries are struggling to hang on to workers in a booming jobs market.

In response, bosses are doing what I did in an earlier life when fate cast me briefly into a job in management. They are doing their best to throw money and promotions at would-be resigners to convince them to stay.

But should they? The answer is not as straightforward as it seems.

A counter-offer seems obvious for a measurably proven star, especially if they are also stable, gracious and leaderly, which a lot of stars are not.

As for how much money people should be offered to stay put, it is worth considering the cost of replacing them.

One UK study in 2014 showed the cost of finding, interviewing and temporarily replacing a new worker — and bringing them up to optimal speed — cost an average of £30,600.

If the newcomer is joining from a company in the same sector, reaching optimal productivity might take less than four months, this Oxford Economics research found. But that could rise to eight months for someone from a different industry; 10 months for a new graduate and a year for someone re-entering the workforce.

Saying that, counter-offers can also backfire if not handled with care.

Offering a swag of money to someone who has been serially underpaid can have the opposite of the intended effect if it leaves them seething about how much pay and recognition they have been missing out on for years.

That underlines a deeper question: are people being tempted to leave because of money alone? Or is it due to wider structural problems such as a lack of attention to career progression; inflexible work patterns; poor managers or dire staff shortages and overwork?

If the latter is the case, beware. A pay-based counter-offer that seems to have worked in January might have failed by April if the recipient gets another proposal from a more adroitly managed organisation. The offerer will have merely shelled out money to defer a problem rather than fix it.

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It is obviously smarter to find out what is driving departures and, if possible, pre-empt them by, say, setting up a system to alert flight risks about internal job opportunities. Some companies that have tried this claim it has cut attrition rates and kept valued staff who might have otherwise left.

Finally, generous counter-offers can infuriate other employees, especially if there is ever a hint that the would-be flight risk’s offer was not as solid as advertised.

In the past, I think it was probably easier to dismiss this sort of reaction as sour grapes. In a hot jobs market though, it is more dangerous. There is a high chance people are already sitting next to new but less experienced job-hoppers earning more money for the same work.

In other words, they are paying a “loyalty tax”, says Adam Grant, the US organisational psychologist and author. He thinks there is a case for employers to offer “retention raises” to reward commitment. That is by no means an easy option for all businesses. But it does highlight the need to think very carefully about who is being rewarded to stay — and why.

pilita.clark@ft.com