How to Prevent or Fix Demoralizing Pay Compression Inequities

Inevitably, Wudyka says, when I evaluate organizations’ compensation, there is pay compression somewhere in some range or grade. Wudyka is managing principal of Westminster Associates in Wrentham, Massachusetts. His tips came during a recent webinar sponsored by BLR.

Defining Pay Compression

Pay compression occurs when the pay rate of an individual is “uncomfortably close” to that of another individual. It could be, for example, a new hire making the same as someone with several years’ tenure. Or it could occur between peers, between supervisor and subordinate, or even between employee groups.

How Does Pay Compression Happen?

In general, compression occurs due to administrative error. If you’re the administrator, you may not agree, says Wudyka, but a lot of pay compression occurs when we aren’t looking. Things happen—promotions, changes, upgrades, and merit, general automatic, semiautomatic, and cost of living raises all happen. In this dynamic system, pay rates changing all the time.

If we overlook the changing value and contribution of employees, or if we’re lax about monitoring of the compensation program, our rates, and the linkage between rate and contribution, it’s easy to allow pay compression to sneak up on us.

Unfortunately, once the error occurs, it can take lots of time to fix it.

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“Visualizing” Pay Compression

X = pay rate of an individual employee

As the chart shows, pay compression within a grade usually happens at the lower and upper ends of the range. It happens at the lower end when new people leapfrog those already in the job.

It also occurs at the top end of the range because people pile up together at the top of the range. Those with lesser experience are paid the same as those with greater experience.

What Are the Causes of Pay Compression?

• Poorly set hiring rates. This is the number one cause of compression problems, says Wudyka. When bringing people in from outside or other divisions, it’s a long road of challenge if you set a rate say 5% higher than it should be. It can take a long time to get the relationship fixed. Especially in these days of 2-3% increases, it’s hard to get budget for pay equity adjustment, Wudyka notes.

• Managers operating alone. If the rate recommended by the line manager (who never has all the facts) is not reviewed by a comp specialist, you can easily create problems.

• Poor pay administration. This happens when management is not diligent enough in paying attention. Remember, it’s a dynamic system. Note, says Wudyka, that if you just do across the board increases, there’s no real effect on compression. But with merit, general, skill-based pay, etc., you’re required to pay closer attention to changing pay rates.

• Lack of pay planning. When pay rates change each year, or there’s a new merit budget, hand in hand should be an analysis of pay, Wudyka suggests. Look at the current relationships and the outcome that will result. What will the next snapshot be after processing all recommended increases?

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• Lack of flexibility in-grade pay change options. Examine your pay system to see how many options you have for changing pay rates.  If you are just giving across the board increases, that’s easy to administer, but it doesn’t give you the flexibility to make pay compression corrections. Look at options for recognizing employees with in-grade pay increases, merit raises, skill-based pay, etc.

• Avoidance of equity adjustments (perpetuating an existing problem). If you do have flexibility and budget to make special adjustments, by all means make them where see clear inequities. Caution: when you do grant such adjustments, clearly convey that this is not because of meritorious performance; it is purely an equity adjustment.

In tomorrow’s Advisor, Wudyka’s nine steps for dealing with pay compression, plus an introduction to a timely webinar—How to Find and Fix the Pay Errors You Don’t Even Know You’re Making.