Usually the term ‘loyalty tax’ refers to the higher price we pay to a bank or loan provider compared with new customers. The issue is made worse because lenders periodically apply rate increases to loyal customers. However, they typically don’t pass rate cuts on to existing customers. ‘Loyalty tax’ is so commonplace that the Reserve Bank of Australia has publicly urged Aussies to shop around for lower rates from lenders.
We are now seeing a ‘loyalty tax’ effecting employees as well, many companies either unconsciously or knowingly keep the wages of long-term staff lower. LinkedIn reported here on the trend for many organisations today to take loyal workers for granted when typically in the past they would have been rewarded with watches, promotions etc.
LinkedIn writes “LaborIQ, a compensation data provider, looked at 20,000 different roles and found that, on average, new hires were being paid 7% more than incumbents already doing the same job. Another analysis put the “loyalty tax” at 10% to 15%.” So, if there is a new recruit doing the same work as you, it’s more than likely they’re being paid more. Faithful employees may experience the added issue of shouldering an increased workload caused by less loyal colleagues moving on.
Reasons employees pay a ‘loyalty tax’
- The reality is that most companies will pay staff the minimum they can get away with paying them. This makes economic sense even if there’s an ethical dilemma presented by this.
- If a vital candidate isn’t prepared to sign on and work at the lower rate that loyal staff are being paid. Then the company will be forced to up the individual’s salary in order to hire them.
- Employers can underestimate the value of staff they already have.
- Sometimes long-term employees may have become stagnant or even disinterested in their job. They may not extend themselves beyond the minimum needed to meet their job requirements. All of which, of course, doesn’t inspire their manager to give them a pay rise.
- Loyal staff may neglect to ask their boss for a pay rise.
Ways to avoid ‘loyalty taxing’ staff (and why you should avoid it)
- Keep in mind that it’s more costly to hire and train new employees than it is to invest in the team you already have.
- Consider salary matching loyal employees with new hires at the same level to encourage loyalty.
- Establish solid training programs and career development pathways.
- Give your hard-working staff salary increases. If you want staff to continue being loyal, they need to feel appreciated and respected. This can’t be achieved if you are paying them below their pay grade level and refusing pay increases.