Salary compression is an issue that affects many organizations at one time or another. When making salary-related decisions, it’s important to consider how to avoid pay compression. By doing so, you’ll increase fairness and promote job satisfaction. In turn, employee loyalty and retention will rise.
In this article, we’ll first define salary compression. Then, we’ll examine how to avoid and address this critical issue.
Table of Content
1. What Is Salary Compression?
2. What Causes Wage Compression?
3. How Wage Compression Affects an Organization
4. Challenges in Addressing Salary Compression
5. Diagnosing the Problem: How to Spot Wage Compression
6. Fixing Pay Compression: Strategic Solutions
7. How Primalogik Supports Fair Compensation
What Is Salary Compression?
Salary compression refers to a situation in which pay differences between employees at different levels become minimal. Long-tenured employees and new hires—or those at different skill levels—might then receive similar pay, which can cause dissatisfaction among long-term or highly skilled employees. Or, supervisors might earn similar pay to their direct reports. Also known as wage compression, or pay compression, this can result in decreasing morale by causing some employees to feel undervalued or unrecognized.
Addressing and preventing pay compression is an important part of a company’s people strategy. By strategically addressing this issue, you’ll enhance job satisfaction among your employees.
What Causes Wage Compression?
Numerous factors can influence an employee’s salary. Pay compression can happen for several reasons:
- Offering higher pay to new hires, in order to attract top talent in a competitive market.
- Increases to minimum wage without corresponding adjustments across the board.
- Lack of a structured compensation plan that pertains to all roles and functions in your organization.
In some cases, different departments might have their own budgets, creating a disjointed approach to assigning compensation. Situations like mergers and acquisitions can also lead to salary differences between employees in similar roles.
Essentially, if you’re not planning for how to avoid wage compression, you’re likely to experience it. Next, we’ll look at how that affects a company.
How Wage Compression Affects an Organization
When long-tenured employees earn less than newer ones, serious morale issues can result. Those who have been with your company for years may feel undervalued, affecting their level of engagement. Over the longer-term, this can harm retention, causing people to look for a company that appropriately values their efforts.
Pay equity issues can arise from wage compression, too. If employees in protected classes are being unfairly compensated, this can lead to legal issues, as the Society for Human Resource Management (SHRM) explains. Further, internal equity problems will seriously undermine employee motivation and engagement. Damage to a company’s employer brand will also result when such issues persist over time. Attracting new talent will then become more difficult. (In turn, this could cause the company to offer even higher compensation to new hires, worsening the problem of pay compression.)
Challenges in Addressing Salary Compression
Addressing wage compression can prove difficult for several reasons:
- Lack of awareness. HR and organizational leaders may not be aware that a salary imbalance exists in the first place.
- Budget constraints. Limited budgets are often a primary reason why salary compression begins (and persists). Organizations may spend a higher portion of their budget on new hires’ salaries while neglecting existing employees.
- Lack of centralized performance data. If you don’t know how to accurately measure performance, it’s nearly impossible to appropriately assign salaries. Different managers may have their own criteria for evaluating employees and recommending salary increases, leading to unfair pay divides.
Left unchecked, salary compression will pose a serious threat to a company’s success. Let’s examine how to determine if a problem exists—and, if so, how to resolve it.
Diagnosing the Problem: How to Spot Wage Compression
Let’s explore several practices that will aid in diagnosing pay compression issues.
Salary Audits
Conduct a full salary audit of all roles in your organization. By carrying out regular salary reviews, you’ll quickly spot and address problems. HR should conduct these audits to ensure that all positions are given equal consideration. As part of these audits, take the following steps:
- Look at disparities between performance and pay. Are your highest performers being compensated at a higher level? Or, are moderate and high performers being rewarded equally?
- Check for cases of salary inversion. Salary inversion occurs when newer workers are earning more than experienced employees.
- Look at pay differences between managers and their direct reports. If their salaries are looking similar, pay compression is likely occurring, which can undermine managers’ morale.
If you find that salary compression is occurring, consider what may have led it to happen. For instance, did your organization offer higher pay to new employees to fill crucial roles?
Exit Interviews
Hold exit interviews with departing employees, looking for red flags in employees’ degree of satisfaction with their compensation. Do people regularly cite salary or benefits as a reason for leaving? Ask questions on this topic to gain insights from them.
Employee Surveys
Conducting regular employee surveys can also help highlight any dissatisfaction related to salary. Ask whether they feel appropriately valued when considering their skills and contributions.
Fixing Pay Compression: Strategic Solutions
Take these steps to proactively address any salary compression issues that exist.
Create Compensation Frameworks
Designing pay bands will help you calibrate pay levels across the organization and standardize compensation. Outline pay bands for each position, comparing them against jobs in other functions with similar skill levels or responsibilities. Then, look at whether current salaries fall into these pay bands.
Consider publicizing these frameworks transparently. This builds trust and can help leaders across the organization work to keep salaries aligned.
Identify the key drivers of pay in your organization. If you don’t define it, you can’t measure it.
Use spreadsheets to strategically track pay, as iMercer suggests. Don’t be tempted to make quick one-off decisions, which typically have ripple effects, they advise. Instead, take a comprehensive approach to adjusting pay. If employees are feeling dissatisfied with their compensation, be transparent about your plans.
Strive to Hire Internally
Cultivate talent internally as much as possible, which will help avoid having to pay a premium to external hires, as SHRM says. Try to predict your future hiring needs and engage in succession planning accordingly. Look for high-potential employees who could take on greater responsibilities with the right training and mentoring. Offer these growth opportunities to them, working with them to design a personal development plan. Then, strive to hire internally whenever possible.
Use Performance Data to Adjust Pay
Leverage performance data to make merit-based pay increases. Using performance-tracking tools lets you spot high performers and validate your choices with solid evidence.
Implement regular performance reviews to assess progress, leveraging this performance data. Assess each employee’s compensation level after preparing their review.
Get Leaders on Board
Make the business case for addressing salary compression with organizational leaders. Explain how this issue is negatively affecting employee engagement, morale, and retention—or will be in the future, if left unchecked. Ask them to take clear action to resolve the problem, like reallocating funds across departments.
If you can’t immediately make changes to pay, make a plan for when and how you’ll do so. Consider offering other benefits in the meantime, like additional paid time off. Taking such steps will show you’re aware of the problem and are serious about resolving it.
How Primalogik Supports Fair Compensation
Primalogik’s performance management software helps companies make fair assessments of employee progress. In turn, this supports them in assigning appropriate compensation. Let’s examine how Primalogik’s tools make this possible.
Using Performance Reviews to Justify Raises
Primalogik’s performance review software helps companies conduct fair and accurate appraisals. These tools guide managers in structuring their reviews, highlighting key performance issues to address. Plus, they help maintain a standardized review format across the organization, promoting equitable practices.
Aligning Compensation to Goals and Outcomes
With the help of Primalogik’s software, managers can clearly track progress toward goals. At a glance, they can see the percentage of goals achieved along with steps completed. Then, the organization can align employee pay with objective outcomes. By tying compensation to clear results, you’ll incentivize employees to reach for higher goals.
Monitoring Performance Over Time
Primalogik’s tools help companies document employee performance over time, measuring changes or improvements. When individual performance consistently improves, they can offer higher compensation. These tools can also help you track personal development, assessing skills and knowledge gained over time.
By proactively preventing and addressing pay compression, you’ll boost employee satisfaction. Take the steps outlined above to diagnose and resolve any wage compression issues before they affect your success as an organization. Then, transparently share your efforts with employees. In these ways, you’ll build trust and foster stronger relationships with your talented people.
Learn how our top-of-the-line HR solutions will help you keep track of employee performance to prevent salary compression —request a demo of Primalogik’s performance management solution today.
