A few weeks ago, Google announced that it will give a 10% raise to all of its 23,000 employees, starting January 1, 2011.  While the first thought for many may be, “If only we could give our employees a 10% raise!” a more important question is, “Does a raise for all employees even make sense?”  As the economy becomes stronger and high potential or high performing employees become more willing to leave, the question of how to effectively retain critical talent becomes more important.  In this blog, I will discuss some of the considerations an organization should take into account before embarking on an across-the-board salary increase.  These considerations include the role of the organization’s employment value proposition in attracting and retaining talent, the extent to which critical skills or key roles need to be compensated differently, and the organization’s ability to continue differentiated rewards programs.

The first question organizations should ask themselves is, “What do employees get from working for our organization?”  For the past few years, Google was the “hottest” place to work in Silicon Valley because it was doing cutting-edge work, was in the midst of high growth (which equals challenging projects), and offered significant financial compensation (including stock options and bonuses).  However, if Google has transitioned from “cutting edge” to a “safe place to work” (as one recruiter stated), then the employment value proposition has changed.  This will likely result in Google attracting and retaining different types of employees than it has historically.

This begs the question – what will be the impact of the 10% increase?  We know that to retain critical talent, organizations need to compensate employees at a fair rate compared to what competitors pay.  If the 10% increase at Google makes its compensation levels competitive with others vying for the same talent (e.g., Facebook, Zynga, Twitter), then this is a good move to slow the number of defections from the organization.  However, it is unlikely that this 10% increase will restore Google as the hottest place to work in Silicon Valley.  For example, one experienced engineer who left Google did so because he said, "I was ready for something different and more challenging.”  If Google’s environment lacks the challenges necessary to retain high quality engineers, the 10% pay increase is unlikely to be the key to keeping the talent Google needs.

The second area organizations should consider is how to make the investment in employee salaries generate the greatest impact on the organization.  Each organization has specific roles and skills that are more critical than others.  By making larger investments in these critical roles and skills, organizations are more likely to retain employees that make the most significant impact on the business.  These investments are likely to generate a higher return to the organization than would an investment in raising the compensation level of all employees.  For example, experienced engineers are highly valuable to a firm like Google, which competes with companies such as Facebook for this valuable talent segment.   As a public company, Google can no longer offer pre-IPO stock, meaning its overall compensation offering is lower than other Silicon Valley firms that have yet to go public.  A greater salary increase to experienced engineers may give Google more strength in retaining this critical population versus the peanut-butter approach of giving everyone a 10% raise. 

The third consideration is the impact of an across-the-board salary increase on the organization’s ability to differentially reward high-performing employees.  According to John Stacey Adams’ Equity Theory,  employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it, compared to the perceived inputs and outcomes of others.  If the outcome (reward) from the job is not in line with high-performers’ larger input (effort), they will adjust their input downward. In practical terms, this means that in order for high performers to continue performing at a high level, they need to feel they receive greater rewards for their greater impact than do lower performers with a lower level of impact.  A 10% across-the-board salary increase does not differentiate performance and, therefore, is not an adequate reward for higher performers.  If an organization is going to provide a 10% across-the-board salary increase, it still needs to give additional rewards to high performers to recognize their higher impact.  Without this incentive, the performance level of high performers is likely to decline.

The example of Google has highlighted a number of matters your organization should consider before embarking on an across-the-board salary increase.  As your organization looks at the role of compensation in retaining employees, ask yourself the following questions: 

1. Does the organization compensate at a fair rate when compared to key competitors? 
2. What is the organization’s employment value proposition?  Has it changed recently?  Are employees leaving the organization for compensation reasons or is there a deeper challenge afoot?
3. Are employees in critical roles or with critical skills currently compensated at a fair market rate?  Would higher compensation for these populations increase their likelihood to stay, or are there other things the organization should be doing to retain them? 
4. To what extent does the organization currently differentiate high performers?  Would the organization still be able to effectively differentiate this population if it increases the overall salary of all employees?

Organizations need to fairly compensate employees, but also they must identify and differentially reward high performers.  The talent management function also needs to understand what people expect of the organization and whether or not the organization is fulfilling those expectations.  By doing these things effectively, your organization should be able to make high-impact salary investments that will retain high performers and critical talent.