What is Pay Compression?

Pay compression, also known as wage or salary compression, is pay differential that results from various causes, but that is often deemed as unfair or unequal by members of a workforce. It is an issue that many recruiters and human resources professionals deal with on a regular basis. There are numerous reasons for these kinds of differentials that occur, and they often seem justified in the outset. However, over time wage compression can lead to low morale and hurt feelings within the ranks of previously loyal employees.

Examples of Salary Compression

Salary compression is not a new concept. For example, it’s a common practice for firms to offer a higher starting salary to sought after employees who may be seen as “rock stars” or as someone who has a great deal to offer the company. Higher pay is used as an incentive to lure the candidate. It is also seen when viewing fixed salaried professionals like managers and supervisors versus hourly employees who are eligible for perks like shift differentials and overtime pay. Sometimes pay inequities are seen after a merger of two companies that were run very differently from one another previously. Wage compression can also occur in a company with a large percentage of minimum wage earners when the minimum wage rate is increased; as new hires come on, they are earning the same amount as those who may have been with the organization for years.

Impact of Wage Compression

Impacts of wage compression can be seen on a one to one level or across entire organizations. Those whose pay is compressed, or who are receiving less money, are likely to be affected by low morale. They will feel discouraged, naturally. It doesn’t make sense to continue working just as hard when their efforts are not perceived as being fairly compensated. This can lead to a more noticeable problem of poor performance in employees, which hurts the bottom line and ultimately affects everyone. There may also be retention issues related to salary compression. Those who feel slighted are more likely to look for alternate employment. High turnover rates are costly to business. It may also be harder to recruit from within for higher level positions if employees see no economic benefit in accepting the added responsibility and work of a promotion.

Dealing With Inequities

Hiring agents and executives can take steps to deal with and manage pay compression. One effective measure would be to take time to regularly look at hiring practices in relation to market conditions and to take steps to ensure that your company’s wages are comparable to those across the board in your industry. Managers can also assess and adjust current employee salaries periodically.In addition, rather than offering across the board higher salaries to well-qualified new candidates, a hiring bonus can be used as incentive instead.

This is an overview of the concept of salary compression. Pay compression is a phenomenon that can truly have negative effects on individual employees, as well as on organizations.