Understanding the range gives you the full story
Let us come back to the original question – if new hire pay rates have gone up so much, why has Aon only reported 2-3% year-on-year salary movements in the Australian tech market?
The first reason has to do with basic statistics. On average, new hires account for just 5-10% of a typical data sample and this volume is not enough to dramatically shift the median, especially when the market is emerging from a period of salary stagnation. For the bulk of employees in the sample who have not changed organisations in the past 18 months, the last two years of negligible salary increases across a large portion of the industry has compounded the effects of 4-5 years of low increases of 2-3% prior to the pandemic.
However, there is more to the story. Averages can only tell you so much, but the range of values in a sample can give you a better indication of what is going on in a dataset.
If we look at the fixed remuneration range from the 10th to 90th percentile in the overall market data and compare it to the same percentile range in the new hire market data, we see a big difference – the range for new hires is narrower but starts higher.
This is what gives us our higher median rate for new hires, but at the 75th and 90th percentiles the difference disappears, with new hire rates capping out at about the same level as the overall rates.
In practice, this means that if your reward strategy is to pay at the higher end of the market (i.e. at the 75th or 90th percentiles), you are probably not going to have the same challenges as an organisation that aims to pay at the median or below – because the current new hire median is closely aligned with the overall market 75th percentile.
For organisations that do aim to pay at the median of the market – which is a significant number – this is a critical dynamic to understand. It is more easily illustrated if we move away from our statistical mindset for a moment and think about this from the perspective of an individual employee. This data shows that if you have a mid‑career employee who is paid just 5% below market for their role, being recruited into a new organisation at only the new hire median can equate to a $20,000‑$30,000 jump in salary.
So what can you do about it?
We have seen almost non-existent salary increase budgets for the last two years across much of the sector, and historically low salary increase budgets for the 5 years prior to that. It is therefore no surprise that employees are seeing an opportunity in the current market to make up for lost time and get a meaningful, potentially life-changing salary increase by moving externally. When they move, their position needs to be backfilled, the organisation is forced to pay the ‘new hire premium’ to attract fresh talent, and the cycle of attrition and recruitment continues to ripple across the industry.
As an HR or Reward professional, what are your options?
- Advocate for a larger salary budget: Individuals do not make decisions in an information vacuum – they take their current salary into account when deciding whether they should leave or stay with their existing employer. With new hire pay rates climbing, even people who quite enjoy their job could receive an offer that is too good to refuse. Remove that option by paying your best talent what they are worth.
- Spend it wisely: Whether you can get approval for a larger salary budget or not, you can do more with less by using an aggressive merit matrix at your next remuneration review. A merit matrix provides a consistent and defensible methodology for giving your best and brightest big, meaningful salary increases at the expense of those who aren’t performing.
- Hire for growth: Not all roles need to be filled with someone who has ‘done it before’. Consider hiring more junior employees (from external or internal sources) that have the right aptitudes to grow into a role, particularly if working under a great manager who can upskill them quickly.
- Build out your EVP and have a compelling total rewards offering: Few employees will jump ship for a 5% discount on a gym membership, so create an offering built around unique benefits with a high value‑to‑cost ratio that can help differentiate your employer brand and encourage talent to join your organisation.
- Rethink your job architecture: If your salesforce is no longer working ‘in the field’ due to the shift to remote working arrangements, do you now have just a very highly paid inside sales team? Similarly, remote working is the new offshoring – consider location-agnostic hiring to increase candidate pools.
- Stay informed: Use a robust and relevant source of market data to keep on top of new hire pay rates. Instead of overall market rates, consider referencing new hire benchmarks for the people you really need to retain.