Pay and Retention: Does it work?

Companies often rely on higher pay as a key tool for retaining employees. When people leave, leaders assume it’s because they weren’t paid enough. When they stay, companies assume they’re loyal. Do these assumptions hold up under scrutiny? 

Ilja Rijnen’s recent piece, The Great Loyalty Lie: Why 77% of Employees Don’t Trust Your Retention Strategy, highlights the growing gap between how companies think about retention and how employees actually experience it. Many organizations still follow outdated models—offering across-the-board pay raises, tenure-based promotions, and inflexible benefits—without questioning whether these strategies work.  

I would like to suggest a different approach to assess if pay decisions help in retaining employees:  

1. Make pay fair and flexible: Employees value different things at different stages of their careers. One-size-fits-all pay structures don’t work for retention as well, since pay may not align to individual employee needs.  

2. Use analytics to test what actually drives retention: Don't assume—measure.  For instance, it should be relatively easy to check what percentage of those that left the organization had compa-ratios below .90, how many high performers that left had compa-ratios below 1.0. You may find these percentages to be smaller than you thought, and the percentage of people leaving that had “competitive” compa-ratios to also be higher than you thought. These findings may confirm what you thought, or lead you down the path of further analysis (e.g., how long since the last promotion?)

3. Leverage AI to personalize pay, predict retention risks, and act before employees leave: Ideally, you want to know the probability that people will leave before they resign, so you can do something to prevent it. Build a model for turnover (it will be a multiple regression model with several variables, one of which will likely be pay). Once you have it, use it to forecast what would happen if you made some changes (e.g., if I raise pay by 5%, how would it impact retention?)

I expand on these points below:

Fair Pay Takes Money Off the Table—Then Other Factors Matter

When you do your analyses, you may find that low pay “pushes” people out, but high pay doesn’t necessarily make them stay. Research confirms this: once employees feel fairly compensated, other factors—growth, flexibility, purpose, and leadership—become more important.  A study from MIT Sloan Management Review found that employees who feel undervalued are four times more likely to leave, even if they are well-paid. But the real question isn’t whether this is true in general—it’s whether it’s true in your company.  

Yet, many companies still default to standardized pay structures that fail to reflect individual needs. The better approach is to offer flexibility:  

- Some employees prefer higher base pay; others prefer variable pay or equity.  

- Some value more paid time off, while others prioritize learning and development opportunities or enhanced healthcare. 

A modular compensation system allows employees to choose the pay mix that suits them most. The idea isn’t to pay more—it’s to pay smarter.  

Stop Guessing: Test Retention Strategies

Retention strategies can fail if they are based on assumptions, and not evidence. Some of the most common myths about retention include:

- “Employees leave for better pay.” Sometimes true, but more often, they leave because they don’t see career growth.  

- “Loyalty is tied to tenure.” Not necessarily. A long-tenured employee might be disengaged and just waiting for the right moment to leave.  

- “Flexibility is a perk.” No—Gartner found that 52% of employees would take a pay cut for more flexibility.  

Instead of following conventional wisdom, companies should test what actually works in their own workforce. How?

- Predictive analytics: Identify early warning signs of disengagement, such as declining performance or reduced collaboration.  

- Compensation benchmarking: Use real-time market data and internal pay equity analysis to ensure fair and competitive salaries.  Fix any problems right away

- Employee listening tools: Ask employees what they value most—before they decide to leave. Conjoint analysis is a great tool for this.

Use AI to Make Pay and Retention Smarter  

Generative AI (GenAI) can take analytics further by personalizing pay and retention strategies at scale. Here’s how:  

1. AI-Powered Pay Personalization: GenAI can analyze individual employee preferences, career trajectories, and performance data to suggest tailored pay and benefits packages. Instead of HR making broad policy decisions, AI can identify what different employee segments actually need.  

2. Real-Time Retention Predictions:   AI models can detect early signals of disengagement, like shifts in productivity, declining engagement survey scores, or reduced collaboration. This allows HR to act before employees decide to leave.  

3. Smarter Career Pathing: Employees often leave because they don’t see a clear path forward. AI-powered career planning tools can help employees visualize internal career options and understand how their pay and benefits will evolve if they stay and grow within the company.  

4. Pay Equity Audits: AI can scan payroll data to detect pay gaps across demographics and role levels—ensuring that pay is both competitive and equitable.  

Test Everything—Even Your Assumptions About Why People Leave  

Even widely accepted ideas—like “employees leave for better opportunities”—should be tested with data. Do they? Or do they leave because they don’t have discussions with their managers about those opportunities inside your company?  

Retention isn’t about following trends or “best practices.” It’s about figuring out what actually works for your organization—and acting on it.  That starts with evidence, not assumptions.