This commentary was first published on CNA (April 24, 2023): https://www.channelnewsasia.com/commentary/employee-loyalty-tax-pay-raise-switch-company-hr-work-3405556
SINGAPORE: “Oh dear, are you aware your current salary is on the lower side? With your experience and skills, you should be drawing something higher in this range.” This is what a recruiter told me after I spent a few years working at a company. Granted it could be their pitch to make me move, but it made me wonder if I should be getting paid more.
According to news reports, some junior employees in Singapore are earning less than new hires following a spike in salaries for fresh graduates.
This phenomenon has been observed elsewhere in the world. A May 2022 study by US-based HR analytics company LaborIQ found that on average, new employees are paid 7 per cent higher for the same job title. Fresh hires can earn up to 20 per cent more for in-demand jobs such as those in tech and finance.
Even re-joiners were found to draw up to 25 per cent more pay when they returned to their former employers, according to a 2022 report by Canadian HR analytics platform Visier.
It got me thinking that perhaps employee loyalty isn’t worth much.
Exploiting employee loyalty
Employees who stay put with an employer can be low-balled into receiving a “discount” of smaller pay increments instead of proper compensation.
If those employees were to move to another company, they might receive a significant salary raise. US business correspondent Aki Ito calls this a “secret tax” – others prefer the term “loyalty tax” – in referring to the price employees pay by staying with a company.
In my case, I blamed my ignorance about market rates. For others, it can be a reluctance to change jobs, or being too meek to ask for a raise. But then again, why should employees be penalised for their loyalty?
In an ideal world, a company and a worker enter into an agreement where for every unit of work, there will be an equal unit of reward. Everyone goes home happy.
But in reality, shrewd employers will do what they can to keep costs low, even when it comes to human resources.
An August 2022 survey of Australian workers by recruitment company Robert Half revealed that while 96 per cent of employers were prepared to award raises, 63 per cent of them will only offer pay raises to those who ask.
In stark contrast, only 44 per cent of employees plan to ask for a pay increase.
Loyalty discount will backfire on employers
Managers should take note: When loyalty is discounted, so is employee retention. Workers are also feeling the pinch from inflation and want their pay cheques to keep pace. According to a survey by recruitment firm Robert Walters published late last year, more than 78 per cent of Singapore workers will consider changing jobs in 2023 if their pay increment is lower than the inflation rate.
A survey published October 2022 by recruitment company ManpowerGroup said Singapore workers that stay on can expect salary increments of 3 per cent to less than 5 per cent in 2023. With core inflation at 5.5 per cent in February, that raise might not be sufficient for Singapore workers.
When headhunters come knocking, workers can take flight and even join direct competitors – probably a company’s worst nightmare.
Employers must remember that the cost of retaining workers is less than that of employee turnover. Replacing an employee can easily cost a company 6 to 9 months of their salary. The impact it can have on the morale of remaining colleagues is not to be underestimated. A high churn can also tank a company’s reputation, affecting future talent acquisition.
Secrets do get out
Perhaps companies get away with loyalty discounts because salaries continue to be shrouded in mystery at workplaces.
Thankfully, authorities and employees are acknowledging that such pay inequity is not sustainable. Salary transparency laws are being implemented across US cities and states, with more slated to follow in Europe. It’s only a matter of time that the rest of the world catches up.
In a viral Twitter post, a New York tech worker shared how the state’s pay transparency laws helped her discover that her company was willing to pay US$32,000 to US$90,000 more to new hires for her contract role. This was despite her asking for a pay raise for months.
With pay transparency regulations, not only can employees find out whether they’re paying a loyalty tax, but it can make companies avoid imposing one in the first place.
Employees today have more access to salary data thanks to social media and company review platforms. It is in employers’ interest to communicate a clear and transparent framework around compensation and ensure unbiased pay practices within the organisation.
Some would argue that employee loyalty is more than just salary. I have no doubt about it too.
But compensating employees fairly and transparently is a sign of respect and recognition for their contributions to the company. Building this trust will go a long way beyond salary figures.