How sustainable is it to pay star performers above the market rate?

As per industry experts, companies tend to pay their star performers 15-20 per cent more than the standard market rate

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Paying star performers above the market rate is quite common in the corporate world. Today’s job market is characterised by fierce competition for talent, and certain industries, such as information technology and tech products and services, are struggling to fulfil the huge talent demand. With the pandemic having subsided in most parts of the world, normalcy is being restored to ‘pre-pandemic’ levels. This has led to a surge in demand for talent across sectors, even while attrition has soared to an all-time high.

Given the circumstances, what better way than to lure quality talent and retain them with money?

By paying them above market rate, companies ensure that competitors find it unable to afford or lure their best performers.

“Such tactics are quite common in the corporate world,” admits Ranjith Menon, SVP-HR, Hinduja Global Solutions.

“Companies are trying to avoid a sharp differentiator between their average performers and star performers, since they do not want to disappoint the former either”

Vivek Tripathi, VP-HR, Newgen Technologies

A study by Business Insider found that some of the top employers in the US were willing to pay their star performers well above the market standard rate. These top ranking employers in terms of compensation, were ready to shell out a premium for their best talent. In fact, on an average, their star performers get 10 per cent above the market rate! Interestingly, Facebook (now Meta) tops the list, paying its star performers 25 per cent above the market rate in order to retain them.

Some of the HR leaders that HRKatha spoke with, reveal that many companies, especially in the IT product services sector, or the start-up space, or even in the IT services segment, pay their star performers between 15-20 per cent more than the market rate.

“These employees may earn an extra year’s salary every two years, as compared to the standard market rate,” says Paramjit Singh Nayyar, CHRO, Hero Housing Finance.

Attract and retain

Organisations pay more than the market standard not just to attract talent but also to retaining them. In the year 2006, the remuneration of journalists went up in the media and entertainment industry. Many new channels were launched in India, such as Times Now and CNN-IBN. Even the newspaper, DNA (Daily News & Analysis), was launched around the same time. Therefore, the demand for journalists went up and naturally, the salaries of journalists increased by 40 to 50 per cent above the prevailing market standards.

One of the HR leaders shares that a similar phenomenon was seen in the tech space when Microsoft launched its hub in Hyderabad. With the software major looking out for the best techies, the demand for tech talent spiked in India.

How sustainable a strategy is it to outdo rivals in a talent war by offering more compensation to star talent? Opinions vary in this regard.

Average/solid performers vs stars

Vivek Tripathi, VP-HR, Newgen Technologies, opines that the industry is not finding this tactic sustainable. It is not working, as the attrition rate in the IT services sector continues to remain high.

“Well-established firms may not look to retain talent through compensation alone. They will provide holistic benefits in terms of upskilling, empowerment and career growth”

Paramjit Singh Nayyar, CHRO, Hero Housing Finance

“Companies are trying to avoid a sharp differentiator between their average / solid performers and star performers, since they do not want to disappoint the former either,” explains Tripathi.

He goes on to enunciate that due to the shortage of talent in the market, companies do not want to make their average performers — who may constitute about 60-70 per cent of the workforce —unhappy, and lose them.

If the solid performers come to know of this differentiator, the employers will have to justify their decision with strong supporting evidence, otherwise these solid performers will start looking out for opportunities outside.

On the other hand, Menon believes that such a strategy is quite sustainable for the company. “These star performers usually constitute only about five to seven per cent of the total workforce. When this cream layer starts showing returns in terms of performance, the company stands to benefit, on the whole,” points out Menon.

For Nayyar, sustainability of paying star performers depends on the growth of the company or the industry, or on the cycle of growth the industry is in.

“Well-established firms may not look to retain talent through compensation alone. They will provide holistic benefits in terms of upskilling, empowerment and career growth,” feels Nayyar. A growing industry will try to retain or attract talent through money he believes.

He also believes that the philosophy of the company also matters here. If the company believes in giving holistic benefits to its top talent, then it will not consider retaining key talent with the lure of money.

“These star performers usually constitute only about five to seven per cent of the total workforce. When this cream layer starts showing returns in terms of performance, the company stands to benefit, on the whole”

Ranjith Menon, SVP-HR, Hinduja Global Solutions

Critical talent vs star performers

As per Menon, we should not confuse critical talent with star performers. Star performers can come from any function in the company. In other words, they are function agnostic. Critical talent, on the other hand, are required for daily operations of the firm, such as coders or programmers for a tech company.

The sustainability of retaining talent with money depends on the demand for and supply of that talent in the market, and also on how impactful the talent is for the company. Many firms try to compensate salary with ESOPs, or offer variable-based retention bonuses to buy the loyalty of their star performers.

1 COMMENT

  1. 1. Generation after generation feel they are addressing this issue for the first time.
    2. Each generation would have confronted this issue and resolved it, the degree and nature might vary
    3. Instead of money, solution lies in more innovative reward & recognition
    strategies
    4. Money as a motivation is short-lived whereas building challenges on the job in keeping with organization’s goals goes a long way
    5. Employee after a certain stage in career looks more for achievement motivation – ” I did this, has benefited the company in a big way”. ” I was in the team which helped the customer in a big way.”
    6. Identifying star performers is always despite best of tools is subject to questions by those who miss the bus
    7. Consequently organization creates different class of people thereby decelerating inter and intra team working
    8. In an era when more people are leaving jobs for a variety of reasons, innovative retention methods will work and not appeasement with more money
    9. A paradoxical situation which defies easy logic and understanding is evident in some businesses. Left employees wanting to come back to previous organizations even at reduced salaries
    10. All in all, human resource management in any era will remain a huge challenge more than any business or technology challenge.

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