HR Perspective with Memory Nguwi
ORGANISATIONS spend enormous amounts of time developing strategies, improving productivity, reducing costs, and acquiring customers. Yet many of the same organisations make one of the most expensive mistakes possible: they ignore the salary market.
Some leaders believe they can determine salaries based solely on what they can afford, historical practices, or internal preferences. Others deliberately choose not to benchmark salaries because they fear discovering that they are underpaying employees. The market, however, does not care about internal excuses. Talent moves according to supply and demand. Organisations that ignore the market eventually face recruitment difficulties, rising turnover, and declining productivity.
The labour market operates much like any other market. Organisations compete for talent in the same way they compete for customers. A company may believe it is paying fairly, but fairness is not determined internally. Employees compare what they earn with what they can earn elsewhere. The moment the gap becomes significant, retention risks begin to emerge.
One of the first consequences of ignoring the market is the loss of critical talent. Top performers usually have more employment options than average performers. They are often approached by recruiters, competitors, customers, and professional networks. When salaries fall substantially below market levels, these individuals become increasingly vulnerable to external offers. Organisations are often shocked when their best people leave, yet the warning signs may have existed for years.
Ironically, many organisations discover the true market value of employees only after they resign. Suddenly, management realises that replacing the individual will require a salary significantly higher than the one being paid. In some cases, replacement costs exceed the salary increase that would have been needed to retain the employee in the first place. Recruitment fees, onboarding costs, training expenses, lost productivity, and disruption to customer relationships often make the actual cost of turnover far higher than most executives appreciate.
Another danger is the gradual deterioration of workforce quality. When compensation falls below market levels, organisations begin attracting fewer high-quality candidates. The strongest candidates simply self-select out of the recruitment process. The organisation may continue filling vacancies, creating the illusion that everything is working normally. However, over time, the quality of talent entering the organisation declines. This is rarely visible in the short term but becomes painfully obvious after several years, when capability gaps start to appear throughout the business.
Ignoring the market also creates succession planning problems. Organisations often assume they can develop future leaders internally, but talented employees are unlikely to remain in environments where compensation is consistently uncompetitive. The result is a weakened leadership pipeline. When senior positions become vacant, there may be no suitably prepared internal candidates available. The organisation is then forced into expensive external recruitment exercises.
The impact on employee engagement should not be underestimated. Compensation is not usually the strongest driver of engagement, but it can quickly become a source of disengagement when employees perceive that they are significantly underpaid. People may initially tolerate below-market salaries if they enjoy the work, leadership, culture, or growth opportunities. However, there is a limit to how long these factors can compensate for a substantial market gap. Once employees believe they are being unfairly rewarded relative to the market, trust begins to erode.
Some organisations make the mistake of assuming that because employees are not complaining, compensation is competitive. Silence is not evidence of satisfaction. Employees often conduct their own market research through professional networks, social media, recruitment agencies, and job interviews. In many cases, an employee may discover they are underpaid long before management becomes aware of the issue.
Perhaps the most dangerous consequence is the emergence of pay compression and structural distortions. Organisations that fail to monitor the market often find themselves paying newly hired employees more than long-serving staff in similar positions. Existing employees become frustrated when they discover newcomers are earning comparable or even higher salaries despite having less experience and organisational knowledge. Such situations damage morale and create perceptions of unfairness.
Ignoring the market can also expose organisations to strategic risk. Consider critical roles such as engineers, software developers, finance professionals, cybersecurity specialists, medical practitioners, or senior executives. The market for these skills can change rapidly. Organisations that fail to monitor salary movements may suddenly find themselves unable to recruit or retain people in strategically important positions. The consequences can include project delays, service failures, compliance breaches, customer losses and weakened competitive advantage.
A common misconception is that market competitiveness means paying at the top of the market. It does not.
Effective remuneration management is about positioning. Some organisations deliberately target the 50th percentile of the market. Others target the 60th or 75th percentile for critical talent segments. The key is to make informed decisions rather than operating blindly. Paying below market can be a legitimate strategy if supported by compelling non-financial benefits, but it should be a conscious choice rather than an accidental outcome.
Organisations should also remember that the relevant market is not always the industry market. The true market consists of organisations competing for the same talent. A manufacturing company may compete with mining companies for engineers. A bank may compete with technology firms for data scientists. A hospital may compete internationally for specialist medical professionals. Defining the wrong market can be almost as dangerous as ignoring the market altogether.
The solution is straightforward but requires deliberate choices. Organisations should regularly participate in credible salary surveys, benchmark key positions, review pay structures, and assess competitiveness at least once or twice a year. Market data should inform remuneration decisions rather than dictate them. Equally important is ensuring that managers understand market positioning and can explain compensation decisions when employees ask.
Ultimately, salary markets operate whether organisations choose to acknowledge them or not. Ignoring the market does not eliminate competitive pressures; it merely blinds management to them. The market is always speaking. It speaks through resignations, recruitment difficulties, declining applicant quality, retention challenges, and employee dissatisfaction. Wise organisations listen. Those who do not often pay a far higher price than the cost of staying competitive.
The most expensive salary decision an organisation can make is not paying employees too much. It is failing to understand what the market is saying about the value of its talent.
lNguwi is the managing consultant of Industrial Psychology Consultants and a registered occupational psychologist.