Compensation: The Effects on Recruitment and Retention

Compensation: The Effects on Recruitment and Retention

It doesn’t come as a shock that compensation is something that employees really care about. How much an employee is getting paid for the work they are doing is something that affects their performance, happiness, and whether or not they feel valued.  From earnings, health benefits, incentives, and company culture employees want to feel like they are working for an organization that values their skill set enough to continuously and properly compensate them.

Not all organizations are the same when it comes to how they determine their employee compensation rates.

So, what goes into determining how much an employee will make?

Most companies use a third party compensation and benchmarking service to determine the average of what someone makes in a similar role. Every single organization has a different philosophy on how to compare itself in the job market when it comes to compensation.

Applicants and employees look at a company’s history to determine what they feel is appropriate for their skill set.

Here is a breakdown of how poor compensation affects recruitment and retention:


Reputation is everything, not all companies pay top dollar for employees with similar skill sets.  

Who wants to work for a company that is known for underpaying their employees?

Being known as a company that underpays its employees or one that doesn’t give them financial recognition for the time they have spent working for you can significantly affect your ability to bring in top talent and retain the current talent you have. With the internet and all of its resources, word spreads fast and past/ current employees who have felt their pay was below their worth can really hurt your reputation.  As a result, applicants may steer clear of a company with a bad compensation reputation.


Although compensation is not the only thing that matters to an employee, it does weigh heavily on their decision stay with your company or not.

If/when an employee starts to feel like they aren’t being properly compensated for the work they are performing it could result in poor employee performance and potentially increase your employee turnover rate.  

The best way to avoid being recognized in a negative light to current and potential employees is to implement a proper compensation system.

When an organization does properly compensate it can have positive effects all around. One of the most effective ways compensation can have a positive impact on employee retention is to construct an employee development plan that promises employees career track opportunities with the company.

Performance-based incentives or bonuses is another way to motivate employees. It allows them to align their individual goals with company goals. Even though it isn’t an increase in pay, these forms of compensation demonstrate how crucial employee performance is to the organization’s overall profitability and success.

Not all accomplishments and achievements can result in incentives or pay increases. Appreciation is also key to employee retention and if compensation is a part of recognition then compensation is also likely to increase employee retention.

Employers with a long history of employee retention usually provide competitive compensation, benefits, incentives, and a show of appreciation. Be somewhere people want to work.