Between The Great Resignation, new rounds of layoffs, and an uncertain economic future, employers are facing one of the most challenging hiring landscapes in recent years. But even amid the so-called “Great Reshuffling,” top talent can still command top dollar. In July 2022, more than 5% of job postings on listed a signing bonus — that’s three times higher than in 2019.

With open roles still at astronomic levels, employers are making big bets on talent in the tight market. But overpaying now may have unintended consequences down the line, for both new and existing talent, especially in an environment where pay transparency is becoming the new norm (and mandated in some states).

“Employees today are very open about discussing their salaries, so any hopes of keeping your new offer confidential from your current staff are unrealistic,” says Anjela Mangrum, President of Mangrum Career Solutions. “When your existing workforce comes to know about newbies making almost as much as them after their years-long tenure at your firm, they'll start reassessing the value of their seniority and skills.”

She’s seen many employers who focus so intently on attracting new talent with high salaries or other compensation elements like equity and bonuses, only to end up with retention issues among their current staff. It can be worth budgeting in retention bonuses for existing employees in order to ease the disparity.

The decision to pay big bucks to a fresh hire now can also backfire during performance review season. “New employees want to get promoted within a year or they're off to the next,” says Michelle Volberg, Chief Executive Officer at Giledan Search. “By overpaying them from the start, you'll be overpaying them forever just to keep mediocre talent at best.” This can also lead to a culture where work ethic isn’t as highly valued since comp is so high out the gate, and the business can suffer as a result.

Staying on top of market rates remains key in a volatile economy, keeping in mind both historical, current, and projected market rates. “Employers should penny up for talent, but talent shouldn't overtax,” says Volberg. She advises her clients to set strict salary boundaries, knowing where you’re willing to go, and where you refuse to go when it comes to compensation conversations, and make sure to stick to it. “Some clients are still shelling out for talent, but the really smart ones stick to their guns and still get the best candidate.”

Compensation in the current market is fluid and fluctuating, so accurate data matters more than ever, as well as projections and long-term strategies for potential downturns ahead. “Make sure your team and budget are in place to handle any market, not just the current one,” says Volberg. “That's the secret to scaling. At least that's what some founders have told me who run billion-dollar companies. They don't overpay.”

If you’re already in a situation where you are overpaying fresh talent, it can be worth having an honest evaluation on whether your original expectations are being met. “You might have thought that taking this step would lead to a high-morale team, but you've ended up with a workforce that takes their compensation for granted,” says Mangrum. In that case, it can be worth the short-term pain to let go of your overpaid employees (keeping in mind the costs of rehiring and training) in order to make long-term savings.

Higher pay doesn’t necessarily translate into higher quality work, and the psychological benefits of a big paycheck for an employee can be short-lived after the dopamine hit wears off. At that point, other factors of the job — like culture and values of the organization, the senior leadership, and the career opportunities — end up being more important for long-term satisfaction.

While money talks when it comes to attracting talent, employees also want more balanced workplaces. One recent survey by Lincoln Financial Group found that 64% of full-time employed U.S. adults would choose a company with a less stressful work environment over a 10% higher salary.

Emphasizing a role or company’s non-monetary benefits can be especially effective when it comes to recruiting younger generations. Gen Z values salary less importantly when compared to previous generations, according to Deloitte. When deciding between a boring, better paying job, and one with interesting work that paid less, Gen Z respondents answered fairly evenly. By emphasizing meaningful work and flexible remote work, leaders are more likely to attract younger talent without top-heavy comp packages.

Instead of going to compensation as a catch-all for top talent, Mangrum advises her clients to create a strong Employee Value Proposition (EVP), which balances competitive compensation and benefits with other key areas that the current labor market values, such as career growth opportunities, work-life balance, and job-interest alignment.

By balancing the needs of both fresh talent and the current team, leaders can ensure compensation conversations remain healthy, productive, and market-ready for the business environment ahead.

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