Why companies offer higher salary packages to external hires

HR leaders say workers should follow the simple rule of life: If you need something, ask for it and justify it.

Raghav Despande’s* decision to join a rival after three years was not easy. He asked for 10 percent more than what was offered by the competitor to stay back. HR rejected the demand and Despande resigned.

Apart from adjusting to a new place, what caused him more pain was when he got to know that his replacement was onboarded with the exact salary that he had sought. Despande couldn’t understand why HR failed to retain existing talent with demonstrated skills and performance and was ready to onboard new candidates on the promise of delivering excellence.

According to a 2022 study by LaborIQ, a compensation and labour market analytics company in the US, new hires are paid 7 percent more than existing employees on average. The gap widened to 20 percent for in-demand jobs.

While it's easy to figure out why salaries are supposed to be confidential, it’s quite tricky to understand why HR is ready to lose an existing employee for a new one over salary.

Why HR does this

Amit Sharma, an HR leader in a multinational IT consulting firm, said companies often cap both external and internal increments. The external cap is often higher – generally 30 percent vs 20 percent.

“Anything above this cap needs exception approval,” said Sharma. He said leaders often give exception approval easily for external talent due to the ‘sunk cost fallacy,’ which is the tendency to continue doing something on which money, effort or time has been invested, even if the costs outweigh the benefits.

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In addition, Sharma said Indian employers suffer from ‘shiny new object syndrome’ where an external hire is usually more attractive. Often companies end up paying a premium simply because the new employee is from a reputed company or competitor.

But the case of in-demand skills is different. Sharma himself has been offered high pay increases because of the scarcity of HR tech and experienced talent.

It may appear that new hires are compensated more due to the premium associated with job changes. However, HR experts said over the mid to long term, their salary increments are often adjusted based on their compensation ratio and market position.

“Although this autocorrection process might take some time, professionally managed compensation frameworks ensure the adjustments are made to uphold salary parity within the organisation,” said Rajiv Naithani, chief people officer of multinational IT company Infogain.

He said that though external recruits are in the spotlight, HR departments choreograph a performance that ensures harmony and fairness. These mechanisms, activated during merit increment cycles, work to maintain a balance in pay scales.

If Despande had stayed on in the previous organisation, he might have benefited from an upcoming increment or a promotion.

What is the solution?

There are a few cases of managers themselves reaching out to employees for salary hikes. HR leaders say workers should follow the simple rule of life: If you need something, ask for it and justify it.

Most progressive organisations prefer existing talent for new roles. However, there are times when they require fresh perspectives and new skills and hence look for talent externally, said Shweta Pathak, former VP of HR at Kotak Mahindra Bank.

“Skills is the new currency and continuous learning helps in acquiring more of that currency,” she added.

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Still, if things don’t work, HR leaders say the right question is not whether your colleagues are paid more than you but whether your market value is higher than what you are paid.

“Always ask yourself if you have a rare skill that is not easily available in the market and then you can negotiate a big pay raise while moving jobs, or your company will retain you because you are going to be tough to replace,” Sharma said.