updated on March 22, 2019
In a hot job market, top candidates have their pick of opportunities and often command ever-higher salaries. So companies in need of talent may end up paying a premium for new hires.
That has been the case for the past two years at Integral Ad Science, a New York City-based technology company that analyzes the value of digital advertising placements. To fill job openings, "we've had to a pay a premium because there is a limited pool of talent," said Savio Rebelo, the company's vice president of total rewards.
But what happens when the pay for a new hire is greater than that of his or her peers who have been with the organization longer? This development, if left unaddressed, can cause discord within an organization. Yet, employers should be careful not to react too hastily to these situations. "It is possible to overcorrect" with unnecessarily broad pay adjustments, said Catherine Hartmann, North American rewards practice leader with Willis Towers Watson in Irvine, Calif.
Identify the Problem
Employers offering higher wages to new hires than they're paying to tenured workers in the same positions—or even to more-senior employees—is a form of pay compression. The pay for new hires may initially have been only slightly lower than that of current employees (a traditional pay compression situation), but, as the market tightened, offers to new hires grew larger than the paychecks of long-term staff.
Before taking steps to address this type of pay compression, it's important to understand whether a particular situation represents a broader problem or is an isolated incident. "Be clear on what problem you are solving," said Stacey Carroll, managing director of compensation and benefits for Hawaiian Airlines in Honolulu.
- If a new employee is making more than his or her manager, that is not necessarily a problem. "The boss may earn less because the market value for a manager could be lower than it is for someone with a highly specialized skill set," Carroll said.
- For new hires with much-needed skills but less work experience, it may be appropriate to start them higher in the position's pay range rather than paying them at the lower end.
- If a situation with an employee or new hire is unique, that person may require a compensation package that does not fit into existing job categories.
Specific, short-term talent requirements may also lead to pay compression. In that situation, a new employee may be coming on board to manage a project that will last for a limited time and then leave after the project is finished.
Make Adjustments as Needed
Isolated instances of pay compression may not warrant sweeping salary adjustments. That said, there are times when a highly competitive labor market can reveal stresses on the compensation structure that need to be addressed. If a company is consistently paying new talent more than existing employees, it's time to evaluate:
- Whether the organization is using the right market data to evaluate pay levels.
- Whether existing pay ranges are still appropriate given the organization's talent requirements.
When compression keeps cropping up, "it may be time to look at the whole family of jobs," Hartmann said. If not addressed, resentment among longer-tenured but lower-paid employees could dampen morale and lead to turnover.
Meeting Market Demands
Raising base pay "off cycle" from annual raises through a series of smaller, more-frequent increases can keep compensation in sync with labor-market conditions. "Employers will need to be agile and react faster to the market rather than waiting to make changes," Hartmann said.
This might mean making quarterly pay adjustments for some jobs to increase the pay of current employees rather than waiting for a scheduled pay review.
Other steps to relieve pay compression include:
- Offering hiring bonuses to new talent instead of raising the position's base salary.
- Providing existing staff with spot bonuses to reward their contributions.
- Offering more employer stock to reward long-term workers, such as restricted shares that vest over time.
Draw on Managers' Insights
Involving managers in setting pay levels for open positions can help prevent pay compression issues. After all, front-line managers often have a better understanding of exactly what skills their direct reports need than do HR or compensation experts. By drawing on managers' insights, employers can be more confident that they are setting the right pay levels.
Beyond pay, employers should offer a competitive total rewards package. Carroll focuses on what people value the most and then finds ways to give that to them. For example, a candidate might value more paid time off or flexible hours as much as or more than additional pay, she noted, so more vacation or flextime could be granted to that employee.
[SHRM members-only how-to guide: How to Establish Salary Ranges]
Communicate About Pay
When communicating about pay, whether with new hires or longtime employees, "Be honest about problem areas," Hartmann said. "Communication can focus on Compensation 101—what is the pay philosophy, how does the organization establish base salaries and the variable and equity portions of pay?"
Managers who receive training on how to discuss pay with employees can explain what the organization rewards and address any questions employees have about their pay.
Meeting the Challenge
At the end of the day, organizations that need to recruit certain talent may simply have to pay whatever it takes to do so. If not, "someone else will pay more," Integral Ad Science's Rebelo said. "You just have to keep up."
The Overtime Rule and Pay Compression
The Department of Labor's proposed rule to expand overtime eligibility to 1.1 million additional U.S. workers would raise the overtime salary ceiling—under which workers must be paid time-and-a-half whenever they work more than 40 hours in a given week—to $35,308, up from the current $23,660.
If the proposal is adopted, exempt employees who currently earn less than $679 a week would need to be given a raise to meet the new threshold. Otherwise, they must be reclassified as nonexempt and paid overtime for any hours worked beyond 40 in a workweek.
Giving raises only to workers who need an adjustment up to the new salary ceiling may cause pay compression issues if the pay of those now earning more than $35,308 isn't also increased.
"Employers should consider an adjustment to all related salary scales to avoid salary compression" when complying with the new overtime regulations, according to the Society for Human Resource Management's Knowledge Center advisors. "Alternatively, if budgeting does not allow for such broad salary increases, employers may need to consider whether increasing salaries solely to retain exempt status is an appropriate response to the proposed rule."
Joanne Sammer is a New Jersey-based business and financial writer.
Related SHRM Articles:
Employers Less Transparent About Pay, Aspire to Be More Open, SHRM Online, March 2019
Pay Won't Rise Much Despite Low Unemployment, Researchers Say, SHRM Online, January 2019
Keeping Compensation Fresh in 2019, SHRM Online, January 2019
Address Pay Compression or Risk Employee Flight, SHRM Online, June 2018
Put a Lid on Salary Compression Before It Boils Over, SHRM Online, July 2013