Benefits and Compensation, Recruiting

Avoiding Pay Compression

Pay compression happens when the pay levels within an organization start to converge, and there’s less and less differentiation for things like years of experience and education levels. This happens far too easily—typically because the pace of raises doesn’t always keep up with the speed of market-level wage increases for new hires.

Source: AlexKalina / iStock / Getty

Before long, new hires are coming in at pay levels closer and closer to (or even exceeding) the levels of employees who have been with the organization much longer and/or have much more experience. This is especially problematic in situations when pay compression exists despite big differences in responsibility among those who are quite close in pay.

Thankfully, there are a lot of actions that can be taken by employers to reduce the chances of having extreme pay compression. Here are some examples:

  • Regularly review market rates, even when you’re not hiring, and adjust current employee pay to remain in alignment with what the market is doing as it increases. Salary surveys can be quite useful for this.
  • Give appropriate raises over time, even if not requested by employees, which may mean going beyond the standard cost-of-living raise in order to stay competitive.
  • Regularly evaluate the overall pay structure within the organization to ensure it remains internally consistent and appropriate.
  • Provide training for existing employees to allow them to keep their skill levels in alignment with changing industry needs. (This reduces the problem of new hires coming in with different skill sets that create pay issues.)
  • Consider offering bonuses to employees to help offset a difference in pay. These could be merit-based, for example, to truly benefit the highest performers without changing base pay rates.
  • When bringing in new employees, carefully consider whether any current employees should also be given promotions to new positions to reflect their seniority and level in the organization.
  • If there’s not enough budget to increase salaries for long-term employees, consider other ways of showing appreciation. Examples include more paid time off, more benefits, flexible work schedules, etc.

Avoiding pay compression can be critical to keeping long-term employees satisfied and motivated. If it becomes known that new hires are making a similar salary to long-term employees, that can cause frustration, resentment, and even turnover. Employees have ways of knowing or guessing what others are making, so there’s no benefit to assuming that salaries won’t be discussed. (And, as a side note, don’t ban salary discussion either; doing so can be seen as unfairly restricting employees’ rights to discuss working environments and thus run afoul of the National Labor Relations Act.)

It may seem frustrating to have to continuously pay more money in the salary budget, but salaries needing to grow to keep good employees motivated and satisfied is the nature of the beast. Just remember that it’s almost always more cost-effective to retain good employees than to try to replace them.