Counteroffers – the Right Strategy in Your Battle for Talent?

September 1, 2021
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Author: Lisa Bascom

Your workday is going great until one of your best employees takes you aside to give you their two-week notice. What do you do next: congratulate them on their new opportunity or ask them what it would take to get them to stay? Is a counteroffer the right move to keep that employee?

The competition for skilled labor is historically high for many professions, and it’s a valid challenge facing employers in the battle for talent. With the unemployment rate for Tech and Healthcare around 1.5% and Legal, Management, Architecture and Engineering near 3%, it’s only a matter of time before other companies needing skilled workers will seek your employees.

When is it the right strategy to make a counteroffer to retain a key employee?

The competition is armed with new employment offers, incentives and better financial packages. Wages are increasing at an alarming rate, too. National median wage growth for 2020 was 4.3% but this ranged from 2.1% to 9.2% depending on occupation and may vary even more across locations. With tight talent supply forecasted to continue for several quarters, employers will be faced with ongoing talent shortages and retention issues. And, employees are aware of the evolving employment landscape, so it’s not something employers can afford to ignore.

The Best Strategy – Plan Ahead

There are two key talent strategies to help avoid the negative impact of the “turnover tsunami.”

  1. Do you know if your employees are engaged and motivated in their work? Are they aware of and on board with the company vision? With many companies having employees work remotely full- or part-time, it can be more difficult to assess. Engagement plans are critical to stay on top of working relationships and inclusion.

  2. Proactively monitor changes in the market-rate salary demands for the jobs held by your incumbent employees. The tight labor supply for many occupations has forced wages to increase faster than many employers are aware – or have budgeted for. Waiting to benchmark incumbent salaries to market rate until annual budget setting may be too late to identify and correct the pay gaps your competitors will be glad to resolve for your employees. Adjusting pay now, or at least being aware of current retention risks, could be just the step to keep the talent you need. If your budget won’t allow you to fully close any pay gaps, there may be other non-monetary benefits you can provide in the meantime.

When to Make That Counteroffer

Now, back to that employee who pulled you aside with an unanticipated resignation. If your company is faced with high-value employee departures, compensation could be a core issue where a monetary counteroffer would be perceived as fair resolution.

For practical experience with counteroffers, we spoke with Tony Bohannon, Branch Manager, Finance & Accounting Direct Hire with recruiting firm, The Addison Group. Bohannon recounted that he recently had a job candidate whose reason for leaving his current employer was that he didn’t feel appreciated, didn't receive the recognition or compensation he felt he deserved for his performance.

The candidate warned that if his employer counteroffered with a raise and recognition, he’d probably stay since that’s what he really wanted. “When this guy told his employer he was leaving, the employer started showering him with attention and money,” Bohannon continued. “And that’s what happens when a counteroffer addresses what the employee is missing. He stayed."

As the employer, if you value an employee but aren’t quite sure the employee is telling you the whole story behind their resignation, an easy place to start is comp. Assessing their salary and evaluating if they’re being paid at a market-competitive rate for their job title and experience could be the right step toward retention. Costs of living are increasing, so a pay raise may make a significant difference to the employee. Bear in mind the market rate or above might be what you will need to attract a replacement hire.

When a Counteroffer Won’t Work

Top reasons employees leave include a lack of career development, poor work-life balance and manager behavior. If employees feel stuck in a dead-end job, overworked and unappreciated, they disengage at work. It could be caused by a particular manager or systemic company issues. After a time, rather than speak up, they seek alternative employment. For those who follow the sound advice to “not burn bridges,” an exit interview may not reveal the essential reasons a person decides to leave. A monetary counteroffer would not meet their needs, although it might briefly satisfy them.

“At the end of the day, people will tell you a lot of reasons about why they are leaving but won’t necessarily be truthful about it. But if they’re leaving, 90% of the time it’s probably over things that you are not able to fix – you, as the manager, or the environment or other things,” said Bohannon. “An extra $5,000 will only feel good to that person for a month or two, but the problems are still going to be there.” If your counteroffer is accepted, another six to 12 months is all you should expect from the employee.

The Bigger Picture

Businesses are in a bind. The competitive job market had 6.7 million people quit their jobs in July while there were still more than 10 million open jobs. Businesses are not only faced with hiring new headcount, but also to backfill roles vacated by employees seeking different opportunities and more competitive compensation.

A tool like LaborIQ can be the strategic advantage for talent acquisition professionals and HR compensation teams, as a resource to get instant answers to wage demands for every occupation and city in the U.S.

Being proactive about compensation is a talent strategy that must be deployed to attract and retain talent in today's job market. Without it, you impede company growth. If you find a significant pay gap while benchmarking compensation for a new job post, don’t ignore it. It could very well be a signal that an overall compensation analysis is warranted to get in front of retention risks, and know your total cost to correct as you plan for the next fiscal year.

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