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What Are You Doing About Pay Compression?

With continued increases in minimum wage laws, and with tax-break-fueled investments in employee salaries becoming more common, many organizations are running into pay compression issues, meaning they’re offering higher wages to incoming new hires than they’re already paying tenured, potentially more-senior employees.

Whether it’s due to market demand, government policy, or compensation strategy changes in your organization, pay compression can hurt employee morale and tank employee engagement. Here are four ways to recognize when you have pay compression, and some tips on what you should do to address it:

1. Look out for jobs paying slightly above minimum wage

If you have a set of roles that are paid minimum wage that will be impacted by minimum wage increases, start thinking about the jobs one level “above” those positions and how you plan to approach potential increases as a result. If your entry-level jobs pay minimum wage at $8/hr, what about the positions that make $9 or $10 an hour? When planning for a minimum-wage increase, include in that plan the jobs that are paid close to minimum wage. Jobs that are at high risk of this type of compression are lead or supervisor roles in retail or food service, and jobs in production-related work environments.

2. Make a pay increase plan for jobs with tightly defined levels

If you have very structured job levels across many of your positions, compression may become an issue; for example, what happens when new Software Engineers start getting hired in with similar salaries to those of tenured Sr. Software Engineers. If a market shift is causing the “going rate” for a given position to increase, don’t forget about the other levels of that position when you begin to shift the pay ranges for those roles. Pay ranges of jobs with multiple levels should certainly have overlap, and it’s reasonable to give an amount of discretion to recruiters or hiring managers within that pay range. But if the pay of one position in the job family needs to shift, they all do.

If a market shift is causing the “going rate” for a position to increase, don’t forget about other levels of that position when you shift the pay for those roles. If the pay of one position in the job family needs to shift, they all do.Click To Tweet

3. Don’t put all your money into the new-hire basket

One of the primary causes of pay compression, and a cause of which a business can take direct ownership, is the amount of budget given to acquiring new talent versus what is earmarked for retaining existing talent.

It becomes very common for many organizations to focus budget on talent acquisition by giving “extra” budget to new-hire salary negotiation or items like referral bonuses and hiring bonuses.

Often this means that the budget for annual increases and promotions for existing employees gets “watered down”. The solution? Your organization should be budgeting to pay a relevant or comparable rate to both newly hired and existing employees in a given job. For example, if there is a significant market shift that forces your organization to increase your offer for Project Managers by $10k, you should also be making a plan to increase pay for existing PMs at a similar rate.

4. The market is your friend

One of the best ways to avoid unforeseen compression is to regularly benchmark your positions to the market. What is the location, industry, org type and company size that you typically compete with for talent? You should be defining that “competitive set” and benchmarking your jobs to other similar roles in that market to discern the “going rate” for a position. Those numbers should inform both the new hire pay strategy & the regular salary evaluation or increase process for existing employees.

By aligning pay for all employees in the same or similar job to your market rate, you ensure fair, equitable and competitive pay for all and eliminate pay compression!

Bonus: Fair pay is equitable, not equal

Giving everyone the same pay rate is not a solution to compression. A pay range based on market data and internal alignment should be determined for a given job, and the specific pay rate per employee within that range can and should differ based on performance, experience and contribution.

Giving everyone the same pay rate is not a solution to compression. The specific pay rate per employee within the established pay range can and should differ based on performance, experience and contribution.Click To Tweet

This means that everyone in the Operations Analyst role shouldn’t necessarily be paid exactly the same amount. They should all have the same pay range that aligns to their job (based on market data), and the decisions made specifically about their individual pay should be based on the same decision criteria laid out by your organization to all managers and decision makers.

Need some help determining where you have salary compression and what the market rate for your roles is? Schedule a demo with PayScale.

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Rita Patterson
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