Salary Compression
What is Salary Compression?
Salary compression, pay compression, or wage compression is when employers pay newly hired or promoted employees equal to (or even higher) than more senior employees.
In other words, when there’s little difference in pay among employees with various levels of experience, tenure, or skills within an organization.
Causes of Salary Compression
Market rates fluctuate for positions and minimum wages increase annually. To account for these factors, organizations may raise starting salaries to attract talent in a competitive job market without adjusting the pay for more experienced employees accordingly. Current employees may receive smaller raises, while new hires sign offers with more competitive salaries. Employees who have been promoted may not see corresponding salary increases that reflect their new responsibilities.
Effects of Salary Compression
Long-term employees may feel undervalued or frustrated if their compensation fails to align with their experience or performance. High turnover may occur, as current employees may seek new opportunities where they feel their experience is more fairly compensated. This leads to inequity in the workplace, which reflects poorly on organizational DEI measures.
Employees who feel they’re not fairly compensated may lose enthusiasm for their work, which can result in lower engagement, productivity, and even poor-quality work if they check out mentally and emotionally. They may take more sick days or personal leave as a way to mentally disengage or as a sign of discontent with their current work situation.
How to Prevent Salary Compression
Organizations require a long-term compensation strategy, such as offering targeted raises to long-tenured employees, or adjusting salary bands to better reflect experience levels. Having open conversations around compensation (during stay interviews, for example) may also encourage employees to give feedback on their pay before they decide to jump ship.
Other strategies to prevent salary compression:
- Implement cash bonus awards
- Adjust and review salaries quarterly or bi-annually
- Introduce sign-on bonuses for new hires
- Offer retention bonuses
- Invest in training and development
- Consider internal equity alongside external market rates
To prevent salary compression, organizations can look into equal opportunity employment
(EOE) strategies to ensure pay equity across all employee groups. For long-term success, they can regularly review and adjust compensation in line with industry standards and internal performance metrics to maintain fair pay progression.
How to Deal with Salary Compression
Whatever the industry, the data speaks. Look at historical base pay rates and address all pressing pay gaps as they arise. Different sized organizations require a deep dive into their history and strategies to mitigate any potential cases of salary compression.
Small or Medium-Sized Organizations
Access the current salary structure and conduct salary benchmarking. Research industry salary standards and compare them to what your organization is offering. Review internal equity, and compare the salaries of employees in similar roles or with similar experience within the organization. If you find gaps that don’t align with experience or performance, you have compression.
Perform a root cause analysis. If the organization has grown quickly and hired employees at market rates without adjusting the pay of more experienced employees, salary compression might be a result of this growth. SMBs often lack formal pay scales or salary bands, which can make salary compression worse over time. Develop pay bands based on experience, skills, and performance.
Larger Organizations
Larger organizations have more resources, but they may also face greater complexity in managing salary compression due to large workforces, intricate pay structures, and a more bureaucratic environment. One solution? Gather employee engagement feedback to understand their perceptions of pay fairness to gauge employee satisfaction early on.
Conduct detailed salary surveys and benchmarks to ensure all compensation packages remain competitive. Conduct a thorough analysis of pay across different levels, departments, and locations. Establish clear salary bands (with clear progression) for each role and take into account experience, skills, and performance.
Salary Compression FAQs
Salary compression is a complex and tricky issue for organizations, and happens when there’s little difference in pay between employees who have different levels of experience or responsibility. HR managers and recruiters, here are some of the most common questions on this topic:
Are there any legal risks or consequences with salary compression?
Yes, there can be legal risks, especially if salary compression is causing pay disparities based on protected characteristics, such as gender or age. Under the Equal Pay Act and other labor laws, employees must receive equal pay for equal work, and salary disparities that cannot be explained by valid factors (such as experience or performance) could lead to claims of discrimination.
How does salary compression affect company culture?
When employees feel that their pay fails to reflect their experience or performance, it can lead to frustration and reduced motivation. They may place lower trust in leadership and ultimately leave the organization, which leads to increased recruitment costs.
Can salary compression be fixed without raising salaries across the board?
Yes, there are multiple ways organizations can fix pay compression. For example:
- Offering retention bonuses for long-standing employees
- Providing career development opportunities that lead to higher positions or additional responsibilities
- Reworking salary bands to better reflect internal pay scales and market trends
- Offering non-monetary incentives (flexible hours, additional vacation time)
Dealing with salary compression requires a careful, structured approach for small, medium, or large organizations. While smaller organizations may need to deploy more creative strategies with their limited resources, larger organizations can leverage their scale to implement more formal solutions. Addressing salary compression effectively requires a blend of market research, internal equity analysis, transparent communication, and long-term planning.