Managers often operate on a simple premise when it comes to hiring: get the best workers they can for the lowest salaries.
But that kind of thinking prioritizes short term rewards over long-term gains, and could very well come back to haunt them, according to organizational psychologist Adam Grant. He argues that it’s actually in a boss’ best interest to pay more as a way to cultivate a happier and more stable workforce.
“If you take a longer view, giving people a raise, and in particular, paying them well—some would even say paying them extremely generously—is an investment in motivation and retention,” Grant tells Fortune.
After the pandemic totally upended the jobs market and put bargaining power firmly in the hands of employees, the pendulum has now swung firmly back to employers. In August of 2022, job switchers earned pay increases of 8.4% compared to 5.6% for people who stayed in their roles, according to federal data. But that difference is now almost negligible. Job switchers received around a 4.8% pay increase in January and February of this year, compared to job stayers who came away with a 4.6% gain.
The fact that employers have the upper hand again, however, should not be a greenlight to lowball workers with fewer attractive job prospects elsewhere, says Grant. “When organizations pay on the top end of the market range, they end up with unusual loyalty, because people know that they can’t easily replicate the salary that they’re getting elsewhere,” he says.
Ultimately, he says, decent pay is another way to make sure that employees know the company values their contributions, and believes they’re worth investing in.
“The power of raising someone’s salary lies in communicating to them: ‘Hey, you’re really important to us. We don’t want to lose you. We want to make sure that you can support your family and lead the lifestyle that you dream of,” he says.