Address Pay Compression or Risk Employee Flight

Preventing pay compression between tenured employees and new hires and between managers and their direct reports can keep experienced employees motivated and productive—and less likely to leave, according to findings from a recent report by pay consultancy Pearl Meyer.

Pay compression occurs when new hires are paid the same as or more than current workers in the same position, or when the pay difference between employee levels shrinks so that higher-level workers feel that their pay advantage is no longer significant.

"Salary compression leads to low productivity and morale and high turnover," said Rebecca Toman, Pearl Meyer's survey operations manager, who spoke at WorldatWork's 2018 Total Rewards Conference, held recently near Dallas. "With Big Companies Are Raising Wages for Lower Earners, unemployment down, employees are looking for jobs with better total rewards packages. In this environment, employees will not tolerate inequitable pay."

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Employers should consider off-cycle merit increases to make current employees' pay at least equivalent with recently hired graduates, Toman suggested.

Better yet, adjust salary ranges and structures to keep them current with market conditions, "or you'll find managers making ad hoc requests to increase the pay of a [highly valued] employee outside of the annual pay budget, which finance people hate," said co-presenter Dylan Allread, vice president of human resources at Wag, a San Francisco tech firm that lets people call for a dog walker as they would an Uber.

[SHRM members-only guide: How to Establish Salary Ranges]

'Unfair' Pay Perceptions

At fast-growing companies that are quickly bringing in new people, "if pay seems unfair, you'll have disengaged employees," Allread said. "Salary transparency exists, so assume that employees know if they are being paid unfairly."

Keep pay in line, "especially for top performers," added Steffany Jay, a senior compensation manager at Jacobs Engineering Group, a global provider of engineering services. If newly hired graduates are being paid the same as or more than current employees, with a diminishing differential for tenure and experience, "consider grooming longer-tenured employees for promotion to the next level," she said.

Job descriptions may be an issue, Jay noted. If a new hire is earning as much or more than an experienced employee, she said, then ask, "Is it really the same position, or are these two different roles?"

Organizations should train line managers to discuss salary compression and other pay issues, Toman said, and to refrain from making unhelpful comments, such as responding to requests for a raise with, "If it were up to me …" 

Minimum Wage Increases

States and localities raising the required minimum wage, which is occurring across the U.S., "can be a huge external influence on compression," Toman said. If employers respond by increasing their hourly wage rate, and nonexempt workers are logging in lots of overtime, "hourly workers may be making more than salaried contributors, and even more than their managers," she noted.

Allread suggested solutions for when this happens, such as hiring one or more new hourly workers to cut down on required overtime, or converting hourly workers to salaried positions if it is permissible to do so. If it's not feasible to increase the pay for current workers affected by wage compression, consider rewarding them with a title change or career-development coaching, providing additional paid time off, or granting them stock options if they are part of the benefits package.

Compression can be avoided with proper planning and hiring-manager education, and its effects mitigated with pay adjustments and other benefits. If the issue is not confronted, however, "over the long term, companies will pay the price for ignoring compression," Toman said.

Related SHRM Articles:

Big Companies Are Raising Wages for Lower Earners, SHRM Online Compensation, July 2016

Put a Lid on Salary Compression Before It Boils Over, SHRM Online Compensation, July 2013