Imagine you’ve been working at the same employer for the past 8 years. You’ve received a couple of promotions, and now as a supervisor, you’re earning $16.50 per hour, or $34,320 annually before overtime. It’s the most you’ve ever earned!
The average pay for the staff who report to you is $13.88 per hour, which is 18% below what you make. That seems reasonable to you considering the additional duties you have as a supervisor.
Your employer has just announced it’s raising the minimum hiring rate to $15.00 per hour. You’ve heard a lot about other companies implementing a $15/hour pay rate, and you think “good for us!” You’re hopeful the new minimum hiring rate will make it easier for you to recruit.
After your staff receive their pay increases, you’re surprised to start hearing grumbling. What could they have to complain about? Don’t they know not everyone in the company got a raise?
When your staff start talking to you about their concerns, you begin to understand. Joe, who has worked at the company for 10 years, used to be the highest paid in your department. But now, all his peers are being paid the same as him, including two people hired just 2 months ago.
This gets you thinking about your own pay. You used to be paid 18% above the average staff pay. After grabbing your calculator, you realize that difference has shrunk to 10%! Hmmm … that doesn’t seem right, does it? Didn’t anyone think about this when they decided to increase the minimum hiring rate?
Welcome to the reality of “pay compression,” whereby pay differentials between supervisors and subordinates are too small and newly hired employees are paid the same as (or more than) experienced employees.
A Hidden Fallout and Impact to Morale
Surprisingly, many employers don’t seem to consider this fallout when increasing their entry-level pay. Some organizations may not think through their decision, others don’t have the compensation expertise to predict the inevitable, and some just decide to increase hiring rates despite the negative impact on current pay equity.
Employers that increase minimum salaries without a plan for dealing with the impact on their pay structures will almost certainly have to deal with employee morale issues and turnover.
Discerning employees will realize that by finding another employer, they might come back to be rehired at a higher rate. (Of course, that’s assuming they would be eligible for rehire.) Supervisors or would-be supervisors may decide the extra time and effort required isn’t worth the measly pay increase.
A company’s public relations image may be damaged once employees take their frustrations out on social media and job board sites, negatively impacting recruiting efforts.
How to Increase Minimums and Limit Compression
First, determine the right minimum pay rate for your location and industry. The “Fight for $15” has been in the news for several years now. Don’t assume $15.00 is the right minimum pay rate for your company. Check your market.
Once you’ve done your due diligence, how do you go about implementing the increase without creating compression?
Here are six steps to help limit salary compression:
- Look at your current pay structure. If your pay structure is designed to have a 10% difference between pay ranges, what happens to that difference after you adjust the entry-level minimum? Can you maintain a 10% difference, or should you decrease it slightly? What do you need to do to remain competitive in your market? Your whole pay structure might need to be realigned to the market.
- Look at current employee salaries. Calculate employee comparison ratios, i.e., employee pay relative to the salary range midpoint. Which employees are in the lower half of the pay range? These employees will likely be the ones most impacted by an increase in minimum pay. Can you make incremental adjustments to the pay of current employees to offset the impact of the new hiring rate?
- Consider adjusting entry-level minimums gradually instead of all at once. Many states with legislated minimum pay increases have implemented these increases over a period of months and years, which mitigates the impact on employers’ salary budgets. For example, if you plan to increase your minimum by $3.00/hour or by $1.00 each year for 3 years or you increase the minimum once every 6 months, it may help you reach your target rate while minimizing compression.
- Decide on a reasonable differential between staff salaries and supervisors/managers. Ideally, you already have a compensation philosophy to direct your thinking on this. The specific differential percentage might depend on the level of management position. Just make sure there’s a noticeable difference between staff and management pay.
- Focus on transparency and employee communication. Pay transparency is becoming an expectation. Communicate the reasons for the change to entry-level pay rates, how and when it will be implemented, and the steps being taken to maintain a reasonable level of internal pay equity.
- Ensure people managers are educated and able to answer questions. Give them the information and tools they need to help ensure a successful implementation. Employees should be able to go to their direct manager and get answers regarding the main themes of the pay change; they shouldn’t be pointed to HR for all the answers.
While some employers are downsizing, other market segments have seen businesses ratcheting up their hiring rates. If you’re contemplating such a move, make sure you research your market so you know what your new rate should be. Review your current employee salaries, consider how the new hiring rates may impact existing pay relationships, develop a thoughtful plan to limit compression, and then communicate any changes clearly and honestly.
Jennifer Blake is a Sr. HR Consultant at PerformancePointLLC.