Benefits and Compensation

DIY Remedies for Wage Compression

Barry L. Brown, SPHR, CCP, of Effective Resources, Inc., understands that time and budgets are both at a premium—but that your compensation plan is probably still in need of some TLC. Yesterday, we got some of Brown’s tips for a DIY compensation makeover. Today, his thoughts on remedying a common but serious comp problem: wage compression.

What Causes Wage Compression?

Wage compression is self-induced at virtually every company, Brown says. It’s often created when ranges change and is usually created when a new person is hired and paid more than the incumbent(s). Unfortunately, it’s a problem that cannot be hidden or explained away and, if unsolved, will likely result in expensive legal action. The only way to solve it, Brown says, is with money.

Of course, your compensation philosophy will dictate what you do, to some extent. The important question to ask is, How long for someone to get from the minimum to the midpoint? That’s another way of saying, How long does it take for someone to be fully productive?—because those people should be at the midpoint. It shouldn’t take more than about 3 years for most jobs, Brown says.


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Look to the Ranges

An important part of avoiding compression is dealing with changes in the ranges. Brown offers his “triangle” approach for dealing with people below the midpoint when ranges increase.

How to determine how much of the general increase to give to employees below the midpoint?

First of all, people at or above the midpoint needn’t get part of the range increase—they are already being paid market for their jobs. And people below the minimum should move to the minimum—that’s just common sense.

For those in the range but below the midpoint, create a sliding scale triangle as shown below. It starts at 100 percent of the range increase for those at the minimum and tapers down to 0 percent for those at the midpoint.

The concept is that the people farthest below the midpoint get the largest bump. Find the person’s position in the range on the bottom line, then draw a line up to the slanted line, and read across to find the percentage of the range increase. For example, A is low in the range and will receive 80 percent of the increase. B is not so low in the range and will receive 40 percent of the increase.

Note that this is all independent of merit or other types of increases; this is just staying with the market.

Wage compression, compensation makeovers, base pay, variable pay, incentives, increases … compensation and benefits are never easy! “Maintain internal equity and external competitiveness, with benefits and compensation, and control turnover, but still meet management’s demands for lowered costs.” Sound familiar?

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