Can Salary Caps Affect Talent Retention?

Can Salary Caps Affect Talent Retention

This article was updated on June 17, 2018.

Finance leaders can learn a lot learn from their counterparts in sports leagues with salary caps. Looking at the way salary caps affect talent retention could provide invaluable insight into how these sports organizations manage to both hire the best and maximize value at every position, all while abiding by a league-mandated salary cap.

The Maximum an Employee Can Earn

In professional sports, salary caps are used as a way to control costs and maintain a competitive balance in a league. While caps force teams to make difficult decisions about talent, they can also create tough scenarios. Teams have to strike a balance and be sure they're not overpaying ordinary players at the risk of losing star players.

Unlike the NFL or NHL, most private businesses aren't bound by salary caps. Yet, they often have adjustable, unwritten caps on pay relative to the value the position provides. The league-wide salary cap for the NFL for 2018 is $177.2 million, for example. Similarly, most organizations are constrained by labor budgets.

Looking Beyond the Annual Raise

Employers often grant cost of living increases to remain competitive, but they're also rethinking annual raises. According to Bloomberg, the annual ritual of doling out salary increases is disappearing. Like sports teams, organizations are looking for other ways to increase compensation beyond standard pay increases. This includes everything from bonuses and variable pay to nonmonetary incentives like more time off and fringe benefits.

Ending raises comes with the risk of negatively impacting morale. But raising salaries won't always equate to more productivity or better performance. It's important to raise salaries when warranted, but significantly overpaying employees could have the opposite effect and reduce motivation. When an annual raise is expected for mediocre performance, there could be temptation to just do the bare minimum instead of outperform.

One of the benefits in a market wage system is that optimally priced wages attract motivated talent while pushing out unmotivated, overqualified workers. Employees interested in leaving reconsider when they find out they're being paid more than what they're worth in the open market.

The Right Combination of Incentives

Just like team managers have to think strategically to optimize talent within the confines of salary caps, so do finance leaders. Finding the right mix of monetary and nonmonetary factors to optimize recruitment and retention can be challenging.

A sense of loyalty and commitment, along with the possibility of a bonus, can go a long way in retaining a star performer in the face of a salary cap. In 2015, Peyton Manning accepted a $4 million pay cut to continue playing with the Denver Broncos so the team could use cash for other players, according to ESPN. Manning eventually earned back his pay when the team paid him a $2 million bonus twice for winning both the AFC championship game and Super Bowl.

How Finance Leaders Can Drive Motivation

Organizations can use industry averages and workforce analytics to find ways to increase nonmonetary compensation. Additionally, employing an employee engagement meter lets organizations plug in their business size and industry to learn exactly what their employees need to be productive. Businesses can learn what combinations of key drivers — such as recognition, growth and compensation — increase their employees' emotional commitment and retention. Finance leaders and HR leaders can then work together to strategize how best to use this intelligence to their advantage.

Whether it's a millionaire or an average wage earner, organizations need diverse ways to deliver value to their employees beyond salary. Finding the right mix to retain the best talent under a ceiling calls for strategic thinking and insight into what motivates the workforce.

Where are your employees on the Engagement Meter? Try ADP's interactive tool today to help you drive work happiness within your organization.