As modern companies continue to use a merit-based approach for salary adjustments, elevating internal mobility opens up an avenue to reduce and avoid talent costs.

The pay review process is a common practice in any mature organisation for reviewing salaries. It generally results in the application of a merit increase based on the performance rating of that person, where a rating of ‘below’, ‘meets’ or ‘exceeds’ sees them assigned a salary increase of (for example) 2%, 3% or 4% respectively. These increases tend to be determined relative to the overall salary review budget and distributed using a bell curve (something I’m critical of for knowledge workers, but that’s a different article). For example, a salary review budget might have 3% allocated. A normal distribution assumes that the majority of people will be rated as ‘meets’ (3% increase), followed by an equal number of people ‘below’ (2% increase) and ‘above’ (4% increase) — et voila, a balanced budget. That’s the theory anyway. But, the theory rarely plays out that way, and what results is a managerial massaging of the budget that is rife with bias. So, if so many companies are using it, what exactly is wrong with this approach? Two of the more obvious issues are that: 1) it causes wage inequality, and 2) merit increases detach an individual's salary from what their value is on the labour market, as the two rarely map together. Let’s see what this looks like in practice.

Despite this, the merit increase approach is a deeply established means through which organisations budget and assign labour costs. For many, it’s also unlikely to change anytime soon, but by elevating the internal mobility process, and more frequently moving people between roles, companies can offset the detriment of the merit cycle, regularly ensuring alignment between a person and their value.

For organisations, internal mobility is important for multiple reasons. It’s common to see the list of benefits of internal mobility include improved organisational familiarity and talent development, but it’s better for your company’s financial health, too. By more frequently aligning your people's salary to their place in the market, you reduce overpaying for talent and avoid second-order effects of underpaying for talent — attrition and reduced productivity.

Detaching from the market can directly or indirectly cost you money

First, let’s explore how the issue of detaching materialises, resulting in a mix of underpaying or overpaying for talent. Underpaying occurs when someone’s internal salary doesn’t keep up with the rate at which the market values those same skills. For example, Machine Learning Engineers in a market that is very hot on AI. If your organisation’s approach to reviewing the salary of a Machine Learning Engineer is similar to the 2/3/4 approach I outlined above, you may only be awarding maximally a 4% pay increase in a market that is probably increasing at a rate of 10% or more for those same skills — you’re effectively giving them a pay decrease. Given enough time, the difference between what you’re paying your person and what they’re worth becomes a gulf large enough to drive OpenAI’s valuation through. You may be wondering; if I’m getting talent for less why would that be a problem and not a bargain? Where do I start? First, you’re creating risk for your business because it develops an incentive for people — who are increasingly able to determine their value in the market — to start looking elsewhere when they inevitably learn they’re worth more. I don’t think I need to go into detail on what attrition can cost your business. You may rely on the counteroffer strategy as a means to bank the savings for as long as it takes someone to secure another offer, but this is a damaging approach. 80% of those who accept counter offers end up departing within 6 months, and that jumps to a 90% likelihood of departure within 12 months — not to mention the disengagement from knowingly being undervalued. Counter offers also send a strong signal that your people are only valuable to you when they’re trying to leave — eventually, they’ll keep checking in with the market until you can’t afford to keep them. The merit increase approach can therefore lead to severe detachment of the value of skills from their market rate, reducing productivity and causing increased turnover and resultant hiring costs for your business.

Conversely, you might have people who are happy to stay put despite being underpaid, and uninterested in looking for a new job. But that career complacency is undoubtedly translating to work complacency, too. This means that while you think you’re getting that talent at a discount, it’s because their output is likely discounted, also. In these cultures, your people may not be growing, and their skills and capabilities are stagnating as their market rate does, too. Here’s where we start to see signs of overpaying for talent — when the salary you pay someone exceeds what it would cost to hire that role again. I’ve seen many occasions where someone is on a high enough salary that a merit increase of 3-5% can result in greater gains than the market does for those same skills. Suddenly, they’re earning a premium above their replacement value (sounds callous, I know, it’s a technical term). Worse yet, is that if they’re not inclined to grow and develop into a role commanding of that salary, they’re now incentivised to stay put. They succumb to golden handcuffs the day they choose to look externally for a role and realise they’re paid a premium for their skills. Of course, even when someone remains performant in their role, the market for those skills may reduce. This results in a similar situation where rehiring at a rate aligned to the market would net the business a saving. Now multiply this across a workforce and you can start to see a significant amount of trapped capital in those you’re overpaying.

How internal mobility can stem the cost

Internal mobility is frequently spoken about as a kind of nirvana or hallowed ground sought after by People teams that are knowledgeable in the ways of retaining and growing strong talent. Its documented benefits are myriad, and it’s a key pillar of the famous management book ‘Built to Last’. In ‘Built to Last’, the companies that are deemed to be ‘visionary’ and withstood the test of time, have leveraged strong internal mobility as a key mechanism through which to develop and deploy talent into key roles — such as the CEO position. These organisations could benefit from greater organisational agility with new talent coming in the form of existing employees who were deeply familiar with and motivated by the organisation, and stayed with their companies longer because they knew there were opportunities they were supported to pursue. Internal mobility solves many things, by giving people the opportunity to move across an organisation, you reduce the need for them to feel they must leave to gain the career growth they’re looking for — companies, therefore, benefit from agile talent and strong crossfunctional familiarity. Less discussed however are the tangible financial gains internal mobility generates for organisations: reducing any overpayment of salaries and avoiding the cost of attrition.

Companies don’t start out great at internal mobility — especially not high-growth startups. Younger organisations tend to hire externally for new roles — at the market rate for those skills. That same approach, applied to internal talent, can reduce the issue of salaries detaching from the market.

Reduce the impact of productivity decline and attrition

By elevating internal mobility and deploying internal talent into a role that you’ve budgeted at the external market rate, you are reattaching talent to their market value. If they were coming from a role where they were paid less than the market, that issue has now been resolved, and they’re newly motivated by their fresh opportunity and current salary. The research is clear: paying in line with the industry materially improves productivity and performance, and reduces the risk of attrition. Savings your company can net by elevating internal mobility. Let’s look at this in practice.

In this example, we see that this person's salary (blue) has slower growth when compared to what they may see in the market (red) — assume red tracks the role 1 then role  2 market rate (fewer lines the better). They then move into a new role internally, aligning with its market rate. By happening sooner, they don’t succumb to an ongoing decline in salary compared to the market. They’re now less likely to see their motivation and productivity follow suit before deciding to move to a new company where they can be paid consistent with the market.

Prevent the overpaying of talent

Coming from a role where they were overpaid, you can now release some of that capital by deploying other talent into their vacancy at a rate consistent with the market, too. With frequent talent mobility, you have an opportunity to take an individual’s salary, regardless of alignment to market, and ensure it remains competitive for the individual, ensuring better financial control for the organisation. What does this look like in practice?

In this example, we can see that Person 1’s (blue) market rate is in decline (yellow), meaning they are becoming overpaid relative to the market rate of their skills. If we can move them on into another role, replacing them with Person 2 (red) at the market rate, the company benefits from the savings between where the blue line left off and where the red line starts. Bargain.

Steps you can take to elevate internal mobility

I’ve talked a lot about the benefits of internal mobility, let’s talk about navigating the obstacles to achieving it. One of the biggest inhibitors to internal mobility can be the mindset of leaders. They hate losing talent, and I don’t blame them. They have to find someone else to do the job, they have to train them, there is a higher load on the remaining team, and it’s super disruptive. Start small by facilitating one example of internal mobility instead of trying to change the whole organisation. Curate an opportunity for an existing employee to move into a vacant role and let the results speak for themselves. Imagine how much of a champion a manager will be if they have someone coming into the role who already knows the ins and outs of the business and just needs a bit of role familiarisation before they can be up and running. 

From here, use your champion and build education with your leaders on how to promote internal mobility; what conversations they should be having with their people and how they can encourage their team who are interested in progress to look within the company instead of externally. Work this into your culture to foster this sentiment organisationally; highlight your jobs internally, celebrate when people move positions, show your people that opportunities exist and show them how important it is to you when they embrace them. This will get you 99% of the way there, but an elite method is committing time and energy towards facilitating cross-boarding to gain even greater benefits from your efforts. How are you focused on getting the team from the ‘forming’ stage through ‘storming’ and ‘norming’, and into the ‘performing’ stage as quickly as possible?

But don’t stop with the application, prove your results work. People teams are always saying they want a seat at the table, what I’ve outlined here are tangible ways to reduce and avoid cost, use this to prove your impact on the business. Measure the landscape, how many people now are overpaid compared to your salary benchmarks? What is your attrition like? What other hypotheses do you think internal mobility will aid and document them. Time to fill, check. Speed to productivity, yep. Cost of hire, hello. Internal mobility is a big commercial lever if you pull it right. Use this to show the business how commercially credible the People function can be.