The Loyalty Discount

The replacement might bring a skill the team lacks, or the higher offer might include a signing bonus rather than permanently higher pay. But if you’re pricing the same work differently depending on whether the person already works for you, “next cycle” leaves the discrepancy intact.

What the higher offer buys

Compare the actual job before comparing the numbers. A matching title can hide different responsibilities. Put base pay, expected bonuses, and scheduled equity vesting over the same period, keeping guaranteed cash visible alongside compensation whose value can change. Comparing a new hire’s first-year package with an incumbent’s base salary can manufacture a gap. A grant about to finish vesting also deserves a forward-looking review, even if last year’s total compensation looked competitive.

A higher price can coexist with weaker initial performance. In Matthew Bidwell’s study of a US investment-banking business, using personnel data from 2003 through 2009, external hires initially received about 18% more pay than employees promoted within their existing groups into similar jobs. Yet the external hires received lower average performance evaluations during their first two years.

The study concerns job-entry routes at that business, rather than raises for today’s software engineers. Its external hires also had more education and experience. Bidwell proposed that visible qualifications and uncertainty about job fit could help explain the premium; his analysis didn’t find that changing market rates explained it. The useful inference is limited: an offer price alone doesn’t establish how effective someone will be in the job.

Now consider a company that updates hiring offers when candidates reject them but postpones incumbent reviews until the annual cycle. Those decisions run through different machinery: one has to win a negotiation, the other can avoid one while the employee keeps working. If comparable incumbent pay stays below the price the company has accepted for new hires, staying carries a loyalty discount.

Waiting for an outside offer to unlock a correction makes another employer part of your compensation process. It also gives that employer a chance to make the employee prefer leaving.

The rest of the team’s claim is real

If the justification for a raise is that the role has been underpriced, the other people doing comparable work have a claim to review too. Correcting only the person willing to threaten departure leaves the same discrepancy for everyone else.

So price the affected group before approving an exception. Establish which employees share the gap under your existing role, performance, and location criteria. If a particular engineer’s responsibilities justify higher pay, document those responsibilities in the comparison. Being the manager’s indispensable person is too vague a criterion for coworkers to evaluate.

An annual market review can do this work without a queue of individual negotiations. In its account of its April 2022 salary review, Buffer described checking every teammate’s salary against market data, separately from merit increases. It applied increases bounded at 3% and 6%, with exceptions such as employees whose recent role changes already accounted for the adjustment. The review added $504,000 a year to operating expenses.

That is a substantial recurring commitment. Buffer’s account documents the spend and the policy; it doesn’t measure whether reduced turnover paid for them. It does show an internal alternative to bargaining with each person: review the group, apply a stated rule, and fund the result.

A scheduled review only closes the gaps it is allowed to fund. If an employee’s shortfall exceeds the permitted increase, the review can finish with pay still below the chosen benchmark. Use the scheduled process when it can make the correction; reopen the comparison when a newly approved offer or a known drop in future compensation exposes a gap it cannot handle. Otherwise the hiring process can change what the company will pay while the incumbent process is still enforcing yesterday’s decision.

Put the comparison in front of the budget owner

The engineer’s manager has a different contribution to make from the compensation team. Which work would lose its owner? Who could take it over? The relevant knowledge might include which stakeholder actually needs to sign off versus who just likes being asked, or which failure the runbook doesn’t mention. Identify where that knowledge affects work you still need done.

Then test the replacement case against your own hiring and delivery records. Count recruiting expenses, work displaced onto colleagues, and consequential delays you can defend. Keep cash spending separate from diverted staff capacity, and avoid counting the same lost work twice. If the work is winding down or a capable successor is ready, the cost of departure may be lower than the manager’s attachment suggests.

Compare a funded group correction with keeping current pay over the same budget period, remembering that the raises recur beyond it. In either option, an employee can stay or leave. Start each outcome from current payroll, then adjust for raises actually paid, payroll saved during a vacancy, and the replacement’s pay difference once they start. Add extra recruiting and cover expenses only to outcomes that incur them.

Weight each outcome’s cash cost by its assumed likelihood under that option, then add the results across the affected group. A raise paid before someone leaves still costs money; a replacement’s entire salary is too much to count as an extra cost, because the incumbent would also have been paid. Keep disruption you can’t credibly price visible beside the cash comparison.

The uncertain input is how much the correction changes the likelihood of leaving. A person might stay without it or leave despite it. Discuss what they want rather than assuming pay fixes a bad role, then test whether the spending decision still holds under less favorable assumptions. A calculation that assumes certain departure without a raise and certain retention with one has already chosen its answer.

That can leave a reasonable case for accepting some turnover: the group correction may cost more than the departures it is likely to prevent. If your stated pay policy independently calls for the correction, keep that justification separate from a claim about retention savings.

A manager with context can prepare that comparison and still lack authority to fund it. The decision needs the person who controls the compensation budget, with the compensation team validating the peer comparisons. That owner must weigh a funded correction against the staffing risk and the other work the money could support. Better analysis makes the choice visible; it can’t guarantee approval.

Before approving the next offer for that role, put the comparable incumbents’ pay beside it. If the higher price is justified, record what justifies it. If it exposes a gap you intend to close, name the funding and who can authorize it before another review cycle passes.