Salary Compression

What Is Salary Compression?

The practice of paying long-term employees less than newly hired candidates for the same position is known as salary compression, sometimes known as wage compression or salary compression. Salary compression results in minor pay discrepancies that don't take experience, abilities, level, or seniority into account.

Pay compression occurs when the initial salary for new hires in a certain job title is set too close to the pay rates of your current employees. Even if your tenured employees have greater abilities and experience, in extremely unpleasant situations, starting pay is more than what your existing employees are making.

Additionally, there is pay compression between supervisors and their immediate reports. Most people would believe that managers are paid more than the workforce they are overseeing, but if pay compression exists in your business, this may not be the case, which can be problematic for your team.

What Causes Salary Compression?

Salary compression may result from a variety of factors, and identifying the root of the problem is essential to developing effective solutions.

Raising Offers to Attract Candidates: One of the most frequent reasons for salary compression is when businesses need to raise offers to candidates in order to attract top talent but neglect to also raise salaries for current employees. As a result, less experienced and newer employees may get pay that is comparable to managers or even the company's long-tenured top achievers.

Liberal Stakeholders: It's possible that certain stakeholders may make more liberal pay decisions than others.

If a generous manager is not selective about candidate offers, increases, wage discussions, and counteroffers, they may be facing salary compression within their own team.

Absence of a compensation strategy: Companies that try to implement a compensation strategy too late or do not have one at all may also experience pay compression. An early, junior-level hire, for instance, may get a starting pay that is far more than what a carefully considered compensation strategy would require.

Once a strategy is established, it may be necessary to pay a more senior recruit compensation that is comparable to that of a less experienced colleague.

Few opportunities for advancement:  Employees may get consistent salary raises until they reach the top of their salary bands if there are limited prospects for growth within the company. When others catch up, they may stop earning regular wage raises, and eventually, they will too, when they reach the top of their respective income bands.

Transitions related to remote work: Employers who use regional pay differentials for remote workers may let employees keep their present compensation even if they move to a region with lower market costs. However, when those businesses increase their remote employee counts, pay compression may happen as more senior personnel are brought on board at lower local market pay rates.

Mergers And Acquisitions: Salary compression may happen when teams from businesses with various remuneration packages are together. For example, young employees at one business could make the same amount as their senior counterparts at the other company. Or perhaps the remuneration of individual contributors at one organization is comparable to those of their new supervisors at the other.

The Best Way To Stop Pay Compression

Salary compression is a serious problem that is difficult to fix. Employers can take certain actions, starting with deciding on suitable compensation rates. You can then move on with taking specific actions to improve pay equity.

You may begin the process of getting back on track by following these steps.

• Analyze The Present Pay Practices

By identifying the reasons why this is a problem and investigating any potential underlying causes within your company, you may steer the ship back to a more reasonable internal pay structure.

Create formal compensation methods and rules after completing a thorough assessment of the scenario to avoid further issues.

• Take The Marketplace into Account

It's crucial to take the labor market into account while evaluating existing compensation patterns.

• Encourage Cooperation Between the HR And Finance Teams 

Pay adjustments can be expensive if they aren't factored into the budget of the organization. For this reason, wage structures should be decided in collaboration between HR and financial specialists. It is crucial to have a basic grasp of remuneration as well as financial constraints.

Consider any inequalities that may have developed that may look discriminatory when evaluating your company's compensation structure, such as gender-based pay variances.

In order to avoid major (and expensive) legal issues, gather information and pay close attention to these core causes.

• Consult with legal counsel to determine your next course of action if you find any proof of unfair pay practices.

• Share The New Guidelines

Implementing improvements to the pay structure can be facilitated by showing the workforce that the present corporate leadership is proactive in resolving inequitable pay inequalities. It may also raise team morale.

Conclusion

Salary compression may result in unjust compensation decisions, which might demoralize and disconnect your workforce. However, turnover is costly, resignations are at record high levels, and talent is in short supply.

The best course of action for you is to keep an eye out for pay compression and take action to fix and avoid problems that can cost you the workforce.