GUEST SPEAKER
Pay Compression: What It Is and How to Fight It by Clancy Rowell COMPENSATION ANALYST, INSPERITY
P
any business, whether you’re
Why is pay compression a problem?
growing a small company
Pay compression can lead to
with a candidate, benchmarking
or working at an enterprise-level
turnover if employees feel they’re
an offer using an antiquated
organization.
being undervalued. This is more apt
pay scale can result in the
to happen if long-time employees
applicant turning away from
discover that they’re receiving little
your organization. (Asking for a
more money than new hires.
job seeker’s salary history won’t
The situation can be especially
help much, either, especially if
ay compression can happen in
Yet what is wage compression exactly? How does it happen? And, when it happens in your business, how can you address it? Let’s take a closer look at salary compression as well as how to spot, resolve, and prevent it from reoccurring in your company.
What is salary, wage or pay compression? Pay compression is a compensation issue that develops over time. Also referred to as wage or salary compression, it occurs when there’s little difference in pay between
troublesome when your best, most tenured employees decide to jump ship. Even if they’re not actively
•
Later in the process, when it’s time to discuss compensation
a prospective hire knows they can find a higher paying job elsewhere. You must also be
“
careful about state and local laws
can lose motivation resulting in lost
that prohibit employers from
productivity.
inquiries regarding salary history.)
looking for a new job, employees
Also referred to as wage or salary compression, it occurs when there’s little difference in pay between employees regardless of differences in their respective knowledge, skills, experience or abilities.”
employees regardless of differences in their respective knowledge, skills, experience or abilities. When it occurs, it can be found between: •
Tenured employees and new hires (when new hires join the company at compensation levels similar to long-time employees)
•
Managers and their direct reports (when there are small wage differences between employees within the same job family at an organization)
26
NMEDA Circuit Breaker
Wage compression can hamper recruiting efforts, too. For example:
What causes wage compression?
•
When there’s a significant
To understand how to avoid wage
disconnect between internal
compression from developing, it helps
pay rates and what the market
to understand why it happens in the
indicates is acceptable, you may
first place.
lose out on top talent – especially if a job is posted with an inappropriate salary range.
Below are four common causes of pay compression:
