Everybody loves a good sized paycheck, and if you want to get the best people on board, you need to pay more than your competitors, right? After all, onsite dry cleaning and lunchtime yoga can only go so far in attracting the top talent.
This, of course, is true, but there's a downside to paying above market rate: You create prisoners.
What is an office prisoner? Consultants Aon Hewitt describe it as "people who stay at their jobs despite feeling unmotivated, disengaged and generally negative about their employers."
Fortunately, these people make up only about 8 percent of employees--still enough to be a drag on your company, though. Most employees who become dissatisfied with their job move on, but some stay, and those people are a drag on productivity and morale.
One company that Aon looked into, found that among those who fell into the "prisoner" category, 61 percent received salaries above the market rate.
The thing is, this doesn't seem like a coincidence. Most people who are unhappy with their jobs move on. This is health turnover for your business. While you want to keep your employees engaged and happy, sometimes there is nothing you can do to solve a problem, and they need to move on. If their salary is too high, they won't.
While some people are certainly willing to take a pay cut for a new job with a better workload, shorter commute, or more interesting work, many people are not. Most people live pretty close to the edge. According to a study at Magnify Money, "56.3% of people surveyed have less than $1,000 combined in their checking and savings account." That means most people can't afford to take a pay cut.
As people receive raises, they tend to increase their spending, further binding themselves to their jobs. Which means that if you overpay someone, and that person becomes dissatisfied and disengaged from their work, they can't leave. They may want to leave, but their finances may be keeping them at a job they hate because they can't find another job that pays the same salary.
You may think that paying above market rate is always the best way to hire and retain staff--and it's true that it's very helpful. But when someone is overpaid, they can't leave. You may know this as "golden handcuffs." The combination can be destructive when that overpaid person is a drain on your company.
For this reason, it's critical that you keep your finger on market rates. If you underpay, you'll lose your best people and if you overpay you'll keep your worst. Neither is great for your business.