Written by Stephan Duncan
May 10, 2019
Have you been wondering: "what is pay compression?" It can be tricky to spot, even for seasoned HR pros.
It's time to get a better understanding of what pay compression is, how it can negatively affect pay equity and employee engagement, and how you can take corrective action to prevent it within your organization.
Pay compression, also known as wage compression or salary compression, occurs when employees with the same skills and experience are paid differently.
Sometimes, new hires or employees with less experience may end up being paid significantly more than tenured employees with more experience. This often occurs when the market price for the job rises quickly, forcing employers to pay more to land qualified candidates than they had previously. When these market changes outpace merit and other annual increases, you may end up needing to pay more to attract a new candidate than you're currently paying more tenured employees in the same job in your organization.
Salary compression can also occur when individual contributors are paid more than their supervisors. In highly skilled job families and departments with deep employee tenure, this can sometimes occur when employee salaries rise above those of low-level managers.
If word gets out among your employees that these pay inequities exist, it can cause turmoil, especially among employees who are more skilled or have greater tenure in their roles than their peers. While in most cases these inconsistencies are not deliberate, they can still be disruptive to your organization.
In many cases of pay compression, especially classic salary compression between new hires and tenured employee, the external labor market is to blame. Market factors, like the ones listed below, change over time and can inadvertently lead to pay compression.
All types of pay compression can cause challenges with employee engagement and morale and lead to organizational problems, including:
To avoid pay compression, your organization must first identify if it's occurring, and under what conditions. You then need to prevent it from happening in the future – or correct it if it already has.
To decrease pay compression between employees, gradually bring up the base salary of underpaid employees. Meanwhile, halt or reduce pay increases for overpaid workers. Eventually, the pay for these employees will become (more) equitable.
If it’s not feasible to close these pay gaps through increasing salaries, consider compensating employees with other total compensation rewards, such as bonuses, stock options, additional PTO, or additional benefits (such as paying a higher percentage of health insurance). Promotions or title changes can also improve morale, and perhaps align with further salary increases.
Above all, you should communicate with employees and be transparent about your total rewards system. Share your pay structure, showcase salary ranges for each role, and explain the rationale behind compensation decisions. When employees are confident your organization is promoting pay equity, they’ll be confident their pay is fair and that you have their best interests at heart.
Download our white paper and learn how organizations across the country are using market data, internal analytics, and strategic communication to establish an equitable pay structure.