The 9 Steps to Solving Pay Compression

Pay compression is particularly difficult to address in times of economic hardship, says Wudyka, but there are steps you can take to eliminate it.

Wudyka is managing principal of Westminster Associates in Wrentham, Massachusetts. His tips came during a recent webinar sponsored by BLR.

1. Revisit/rebuild “grade structure.” The first thing we can do is to rebuild our grade structure, which may be responsible for “structural compression.” More often than not, says Wudyka, a major contributor to existence of pay compression rests with the nature of the pay ranges themselves, specifically, that they are too narrow from grade to grade.

When I study market pay rates, the real ranges in the marketplace, they tend to be wider in the external marketplace than they are in the company’s internal structure, Wudyka adds.

2) Make “equity adjustments” to accelerate pay. When you look at a group of employees at the low or high end of the range, identify people whose performance level and rate are not in the proper relationship. Those are the candidates for equity adjustments.

3) Make sure your ranges are pegged to the market. You want to adjust pay ranges on regular basis; my recommendation is to adjust every year. If you can’t do that, it’s likely that you are falling behind the market, at least structurally.
You don’t have to rebuild the structure every year, but you do have to adjust each year.

4) Improve your pay administration. Study rates, attach names, experience levels, and performance levels. Compared to “relevant others,” are employees paid fairly?

5) Consider promoting employees. When concerned about those clustered at the top of the range, ask, is this a person that we can move out and up to another pay grade? Don’t do this lightly, says Wudyka, but if someone could contribute if in a job with higher responsibility, you can solve the pay compression problem.

6) Consider “re-assessing” some employees. If you have underperformers, people whose performance contribution is less than it should be, consider freezing compensation. Generally, we don‘t take pay away, but we can freeze. Or ask, should this person be reassigned to job with lower responsibility levels?

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7) Rewrite job descriptions. Perhaps you need to reclassify employees as duties change. Have a person’s duties, roles, responsibilities changed? Is person’s role too narrow?

8) Consider merit bonuses instead of raises. This is not a solution per se, but you can use merit bonuses to avoid aggravating the pay relationships in compression situations, Wudyka says. The obvious benefit is that you can allow some rates to float up, and others to remain the same to “disperse” the bunched pay rates, all without building increases into base pay rates.

9) Take care setting pay rates for new employees! This is the real “killer,” Wudyka says. His recommendation: ensure oversight by the compensation manager.

Pay compression—never easy, but certainly not your only challenge. In HR, if it’s not one thing, it’s another. Like FMLA intermittent leave, overtime hassles, ADA accommodation, and then on top of that whatever the agencies and courts throw in your way.

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