Pay Compression: Our Nightmare in the World of Compensation

Compression is the ugliest issue compensation professionals face. It tends to be a no-win, lose-lose situation, and the ways to deal with it are limited.

Pay Compression: What Is It?

Compression is when you have small differences in pay regardless of experience, skills, level, or seniority. You see this when the starting salaries for your new employees in a particular job title are too close to the wages of your existing workers. In really awful circumstances, the starting salaries might even exceed what your current employees are earning.

Pay Compression: What Causes It?

There are two main causes of compression. The first is when supply and demand is out of sync, when the need for a particular skill set exceeds the availability. Nurses and software engineers come to mind as recent examples. The second cause can be when your internal compensation structure becomes stale and out of alignment with the external market data.

Pay Compression: Consequences of Not Dealing With It

The obvious problem with compression is the negative impact it has on the morale of your work force. Who wants to welcome a new hire to the team when you learn that that person is already earning more than you? Who wants to fully share company knowledge and have that co-worker successful if resentment over pay is an issue?

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Too many companies in this economy are relying on the current high unemployment rates as their de facto retention strategy. Once the economy picks up, if you have not addressed compression issues, it will be your best performers, not your mediocre or troublesome ones, who race to join your competitors.

Even prior to starting their search for an employer who will pay the current market rate for their skill sets, employees who are on the negative side of the compression issue may utilize a passive flight by giving you the bare minimum of effort to get by with absolutely minimal engagement.

Pay Compression: How Do You Deal With It?

Telling employees not to talk about their pay is not a policy option. By doing so you would put your organization in violation of the National Labor Nations Act (NLRA). The National Labor Relations Board enforces the NLRA even when there is no union presence.

So, the answer is to open the corporate pocket book and pay your current employees more money. “But we can’t afford that!” is your response? What would you have to pay for their replacements if they walk? How would you come up with that money?

If you are in the situation of compression because the funds have just not been available, honest talk about what individuals are paid and a plan on how to make adjustments over time can help. Create a schedule and then keep your word and implement it.

Another option is to ask what can help with an individual’s loyalty other than pay? Sometimes this could be a mentoring or developmental opportunity or a more flexible work schedule to coach a little league team each Tuesday and Thursday at 4:00 p.m. Explore your options with extreme creativity.

One more approach is to re-think your job design. Do you have 10 employees spending half their time on that critical hard to find skill? Could you change the essential responsibilities and instead get by with five or six employees using that skill all of the time?

Pay Compression: How Do You Avoid It?

Forecast ahead and anticipate what your future hiring needs will be. Keep a regular eye on market changes by reviewing market surveys for your key positions and steadily adjust your pay ranges as needed. Usually annual is often enough, but your recruiters can give you early feedback on positions that are moving more quickly in the marketplace. Using job design as a tool may help reduce the number of positions that are influenced by compression, which won’t avoid it, but can limit its impact.

Regards,

Beverly N. Dance, MBA, SPHR-CA, CCP, CEBS
dance@mba.berkeley.edu

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