High salary & lower increments or vice versa — which is better?

In a highly competitive job market, companies are always searching for ways to attract and retain the best talent. One of the most important factors that candidates consider when accepting a job offer is the compensation package. Companies have to strike a balance between offering a competitive starting salary and providing regular pay raises to keep employees motivated and loyal. However, the question is, whether companies should offer high starting salaries and low increments, or the opposite.

According to Mukul Chopra, CHRO, Convegenius, the answer depends on the stage the organization is in. “If the company is a startup or in its early stages, it may need to attract talent by offering higher salaries to entice potential employees to join, as it may not yet have an established reputation or brand. However, for established organisations with a solid brand and reputation, lower starting salaries with higher increments may be more feasible, as they already have a pool of candidates to draw from.”

It is important to understand the pros and cons of each approach. Let’s start with the first option, that is, offering higher starting salaries.

“This is because, such organisations already have an established reputation and can afford to take a longer-term approach to attract talent. They can offer lower starting salaries but higher increments as a way to motivate employees to work hard and remain loyal to the company”

Mukul Chopra, CHRO, Convegenius

 

Offering higher salaries, but lower increments — pros & cons

This approach has several benefits. First, it can help companies attract top talent, especially if they are competing with other employers for the same pool of candidates. A higher starting salary can make a job offer more attractive, and it can also signal to the candidates that the company values their skills and expertise.

Another advantage of offering a higher starting salary is that it can reduce employee turnover. Research has shown that employees who feel fairly compensated are more likely to stay on with their employers for longer periods. By offering a competitive salary upfront, companies can reduce the risk of losing valuable employees due to dissatisfaction with their compensation.

However, there are also some drawbacks to this approach. First, it can be expensive for companies, especially if they are hiring a large number of employees. Second, it can create resentment among existing employees who may feel that they are not being compensated fairly, especially if they have been with the company for a long time and have not seen a significant increase in their salary.

According to Chopra, offering higher salaries to attract talent may be beneficial for startups as it can mitigate the risk involved in joining a new and unproven organisation. However, for established organisations or blue-chip companies, the components that attract talent are different. Such organisations have fixed variables, brand values and a reputation that they have built over the years. In this case, offering higher increments but lower starting salaries could be more appropriate.

“This is because, such organisations already have an established reputation and can afford to take a longer-term approach to attract talent. They can offer lower starting salaries but higher increments as a way to motivate employees to work hard and remain loyal to the company,” explains Chopra.

“A successful compensation strategy should strike a balance between attracting and retaining top talent and managing labor costs while also incentivizing performance.”

Arjun Singh, CHRO, Dixon Technologies

Arjun Singh, CHRO, Dixon Technologies says that offering higher starting salaries can be an effective method for attracting and keeping talented individuals, particularly in industries with a high demand for skilled labor. “It can also indicate to potential hires that the company values their abilities and is willing to invest in them. However, it can be expensive for the company in the short term and may cause issues with salary compression if starting salaries are significantly higher than those of existing employees,” adds Singh.

“A successful compensation strategy should strike a balance between attracting and retaining top talent and managing labor costs while also incentivizing performance. Providing lower increments may result in retention issues if employees feel that their contributions are not adequately compensated,” says Singh.

Offering lower salaries, but higher increments — pros & cons

This approach has some benefits as well. First, it can help companies manage their compensation budget more effectively. By starting employees at a lower salary, companies can save money upfront and allocate those savings towards regular pay raises.

Another advantage of this approach is that it can create a sense of fairness among employees. If everyone in the company is receiving regular pay raises, it can reduce the likelihood of resentment and improve employee morale. This approach also allows companies to reward employees who have been with the company for longer periods and have demonstrated their value through their work.

However, there are also some drawbacks to this approach. First, it may be less attractive to candidates who are looking for a higher starting salary. If a company is competing for top talent, offering a lower starting salary may not be enough to attract the best candidates. Second, if pay raises are not sufficient, employees may feel that their compensation is not keeping up with the cost of living or their level of expertise.

Anil Gaur, group CPO, Akums Pharmaceuticals, admits that compensation, design philosophy and strategy vary from company to company and depend on the business strategy. “Factors such as the size of the industry, job evaluation methodology, the capacity of the organisation to pay and the business’ location are critical when deciding on the compensation plan,” he points out.

“A balanced approach is recommended. The compensation should be competitive and commensurate with the business and industry norms, and the increment should be decided based on the performance deliverables and certain other factors,”

Anil Gaur, group CPO, Akums Pharmaceuticals

“A balanced approach is recommended. The compensation should be competitive and commensurate with the business and industry norms, and the increment should be decided based on the performance deliverables and certain other factors,” suggests Gaur.

He further suggests, “Split the increment into two, where a common increment of 5 per cent should be across the board to compensate for inflation. The balance increments should be purely based on performance and delivery, ranging from 2 to 10 per cent, depending on the performance level.”

Gaur feels that a balanced approach to deciding on the compensation and increment amount is critical for the success of the business.

So, which approach makes better business sense? The answer is that it depends on the specific circumstances of the company. If a company is in a highly competitive market and needs to attract top talent quickly, offering a higher starting salary may be the best approach. On the other hand, if a company is looking to manage its compensation budget more effectively and wants to create a sense of fairness among employees, offering lower starting salaries and higher increments may be a better option.