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08 Apr 2020  ·  5 min read

Stefan van Tulder

How important is a high salary?

Now that many organizations globally are cutting in hiring, promotions, and bonuses we think it’s a good idea to examine how important your ‘Compensation Strategy’ for a job really is.

This post is part of a two-part series about Compensation Management and strategies related to Salaries. We will dive into the importance of compensation management now and in part II we will see if we can do better (we can).

Part I: Compensation Management is important, but why?

Self-help gurus, vloggers, and philosophers all frequently cough up a similar mantra: “do what you love, and you’ll never have to work for a day” (source unknown). We recently gave our users a choice: ‘more compensation and a less interesting role’ or ‘less compensation and a more interesting role’. Keep on reading if you’re curious about the results.

Compensation provides benefits (base pay, commissions, vacation, etc.) to employees in exchange for work performed. Compensation Management has always been a building block of Human Resource Management, as it plays a vital role in recruitment, job performance, and job satisfaction. More than a third of our clients and partners believe that competitive compensation strategies are an integral part of their talent strategy (see graph 1).

But can an ideal compensation management strategy help companies to boost the performance of their talent? Does it create a more engaged working force that’s willing to go the extra mile?

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Graph 1: Companies that - according to their own data - “offer substantially better compensation plans as part of general HR-talent-strategy” for either ‘fresh graduates’ or ‘experienced professionals’.

In this article we will dive deep into our extensive database and find out if:

  • Compensation strategy gives you a competitive advantage?

  • Compensation is all about salary?

  • Talents can be satisfied with your compensation system?

We specifically focus on the S&P 500 companies operational in Europe. This article will reveal some facts that you may not know about compensation management.

1. Up to half of the employees are not satisfied with their current compensation level.

Our data shows that around 48% of the employees are dissatisfied with their current compensation. In our survey, we asked over 6000 users to rate their satisfaction level of compensation (from 1 - Not satisfied to 6 - Very satisfied). The average compensation satisfaction is 3.5, and 48% of the talents scored below 4. If you include people that are only somewhat satisfied, you will notice that 71% of all employees feel somewhat uneasy about their compensation plan. This is important for business strategy as employees dissatisfied with their compensation have lower tenure and engagement.

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Graph 2: Satisfaction with Compensation plan of Employees in their current position and role.

2. Salary is by far the most preferred way to be compensated.

We’ve also analyzed the way in which employees would like to be better compensated, given they are dissatisfied with their current plan. The majority of the survey respondents (73%) chose to have more salary, followed by time off (9%), and equity bonus (7%). We read a lot of articles where companies try to attract talent through other strategies than high salaries, but very few talents (27%) are really attracted by alternatives.

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Graph 3: Preferred way to be better compensated

3. More salary is not always better.

When diving into the full spectrum of - self-reported - salaries of employees we see a fair correlation between salary and satisfaction (r = 0.38).

Nevertheless, when we dive deeper, we see that most of that correlation is carried by the lowest and highest salary tiers (containing <20% of users). In other words, people with a salary well-above €100.000 a year are relatively less dissatisfied (average of 4.5 satisfaction).

When we remove the top and bottom salaries from our analysis (above €100.000/year), we see that the correlation between satisfaction and salary becomes very slight (r = 0.08). This implies that dissatisfied people will say they want more money, regardless of how much they are already earning.

Obviously, this is always a relative notion and needs to be handled with diligence and care. We may, nevertheless, advise that simply throwing money at the problem will not make it go away. Typically, you need to throw a lot of money at people for them to be truly satisfied with their income (feel free to read more about the super-rich and wealth at HBS). The above compensation strategy is unfortunately not a sustainable business strategy and would be ill-advised.

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Graph 4: Relationship between Salary and Satisfaction. There’s a trendline in salary and satisfaction, given we include high salaries, this trendline disappears when we remove all salaries above a 100.000 euro.

To summarise, we have now gathered the following six facts:

  1. It’s a race out there: More than a third of organizations strategically try to compensate better than others (36-47%).

  2. There are losers and winners: Almost a third of users are truly satisfied with their compensation (29%).

  3. It’s all about the money: Most dissatisfied people say they want to be compensated with more salary (73%).

  4. We’re (almost) financially insatiable: The average employee is never really satisfied with their salary (r = 0.08).

  5. We need money: Underpaying employees is a bad strategy (almost guaranteed dissatisfaction).

  6. All of us care about the money: Compensation Strategy is universal: True satisfaction and true dissatisfaction affects all tiers of salary (even the richest can complain while the poorest can be happy).

We can safely conclude that salary has a major impact on employees, and that the pursuit of the highest salaries is real but also - by nature - endless.

Maybe there is a space for passion and vocation after all?

An organizationthat wants to be competitive needs to compensate well but there’s way more to it. In the next part of this research, we will figure out if we can find different drivers of satisfaction that you as an organization can explore by looking at business culture and cultural fit (continue reading here).

 

This post has been co-authored by Li Zhu from ING bank. 

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