3 Common Types of Pay Compression


Pay Compression comes in many forms.  At its very root, pay compression refers to a situation where pay isn’t differentiated enough (i.e.: compressed) where maybe it should be and for a very compelling reason.  When pay compression is present, you may find that your employee morale or engagement takes a dip, leading to a dip in performance and business results.  Their “sense of fairness” alarm may go off and rebuilding trust with employees at that point takes much more time and effort than getting it right the first time.

There are 3 common types of compression that deserve further examination within every organization.

  1. Am I hiring people in too close to or higher than existing employees in the same role?  Pay compression in this case refers to bringing in new talent at a rate that is near or even above (also called inversion) employees who have much more experience in the role and often much more tenure in the organization.  Sometimes you just have to have that newest brightest talent.  Unfortunately, that can sometimes come at the cost of paying competitively for your existing talent.
  2. Am I paying managers less than those they manage (unless that’s right for the role)?  Pay compression in this case refers to managers being paid at a rate lower than those that they supervise.  This may make sense in some technical roles where the market values the individual technical skills higher than management skills.  In most functional areas, however, it’s challenging to motivate a manager when they are being paid less than those they supervise.  As we move into an era where more millennials are entering management roles, this type of compression is especially troublesome.
  3. Am I paying multiple levels of a job essentially the same thing?  Do you have an Admin Assistant 1, Admin Asst 2, and Admin Asst 3?  If so, are there clear differences between each level of the job?  I’ve worked with many organizations that fail to differentiate the jobs, merely creating multiple levels so they can create a sense of mobility.  While it’s true that millennials, and in fact most other employees as well, like to be promoted, they also want to feel a substantive change to both the nature of the job and the compensation associated with it as well.

There are some things that make pay compression even more challenging.  Mergers & acquisitions will often make it challenging for the new organization to level-set pay across different versions of the same job, leading to the first type of compression. Companies with highly skilled hourly jobs, that often earn high amounts of overtime, often struggle with the second type of compression.

And finally, a lot of organizational leaders still struggle with what I think of as the ostrich syndrome: if I keep my head in the sand and don’t look for potential problems, they’ll all go away.  This is absolutely not true and in fact the number one step towards both identifying and remedying compression is to ensure your company has a good market-based compensation plan and processes to evaluate the plan in place.

So what do you do?

  • Have a market-based compensation plan in place and evaluate that plan at least annually to ensure it stays current to market.  Part of having that plan in place also means having a sense of a hiring range that is an abbreviated portion of the full range.  It typically doesn’t make sense to hire new employees at or beyond the midpoint; that part of the range should be reserved for existing stellar employees who are demonstrating their commitment and performance.  And, you may need to provide market-based equity adjustments for existing employees if the market shifts significantly from year to year.
  • Make sure your plan provides fair pay for each job – including the right distance between levels.  The right distance is going to vary from organization to organization and depends on how wide your ranges are.  As a general rule, differentiating jobs by less than 10% (between range midpoints) doesn’t seem to capture substantive differences between job responsibilities.
  • Once your plan is solid and in place, look job by job and job function by job function.  Plot position in range versus experience (or performance).  People with more experience and greater performance should show up significantly higher in range than those with less.  Remember to look both within and between jobs in a career path.  Once you know what your issues are, be sure to develop a plan to bring people to the right place in range

Okay – you’ve built the plan and evaluated how you’re doing relative to that plan.  Now that you know where your compression issues are and how you intend to resolve them, it’s time to communicate to staff.  Communicate what you’re doing right, acknowledge what you can improve, share your plan to get there, and remind people that they are your priority – without whom your organization wouldn’t find success.

How have you handled pay compression in your company? Let us know in the comments below!

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    This is a great article! I linked to it from Twitter and I admit I did not know the definition of pay compression. That being said I have definitely been witness to the scenarios in both the private sector and in civil service – state & federal.

    Thank you.

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