Keep tabs on pay structure to avoid compression

By: Judy Kneiszel

Publication: Benefits & Compensation Regulatory Alert

Date Posted: 09/07/2022

In places like New York City and the state of Colorado, newly implemented wage transparency laws require employers to publish salary ranges when advertising jobs. This causes some employers to feel pressured into offering higher starting wages to attract strong applicants.

In other areas without such laws, that same pressure to increase starting wages comes from tight competition for workers. To attract good candidates for open positions, employers are offering higher starting wages than competitors.

In both scenarios, one outcome can be paycompression.

Pay compression occurs when new hires are paid the same or more than current workers in the same position, or when the pay difference between job levels shrinks so much that higher level workers no longer see their pay advantageas meaningful.

In today's tight job market, it's tempting to up your salary offers to get new talent on board, only to realize later you've caused friction between new hires and experienced workers by compressing pay levels.

If it isn't corrected, pay compression can decrease employee morale and prompt good, long-term employees to seek employment elsewhere.

Benefits & Compensation Regulatory Alert
Benefits & Compensation Regulatory Alert

This quick-read resource — loaded with applicable best practices and real-world case studies — highlights today’s most pressing HR topics to help you ensure ongoing compliance.

To prevent pay compression, establish internal pay equity

To prevent pay compression, employers should establish internal pay equity. This means paying employees in proportion to the relative value of their job. The aim is to place the same value on jobs that are similar in type, difficulty, responsibility, and qualifications.

To create pay equity, you must determine the value of a job as it relates to similar jobs within the organization. If workers with years on the job and greater responsibilities are making $20 an hour, and recent hires with fewer responsibilities and less experience are also making $20 an hour, that would not be seen as "equitable" by those more experienced workers.

It helps to create job families, which are positions that are essentially the same, regardless of the department in which they are located. This makes more sense than organizing jobs by department, since departments are made up of multiple positions that do different tasks.

Once job families are established, factors such as skill, effort, responsibility, and working conditions can be considered in order to determinecompensation.

How to correct wage compression

If disparities are discovered during an evaluation of jobs and pay practices, wages for some employees may need to be increased to correct paycompression.

To avoid the problem in the future, it's a best practice to review your entire organization's salary structure, including starting wages, at least every three years. That way pay inequities can becaught early.

Another effective way to stay on top of wages and prevent compression is to use software that keeps track of pay trends for talent. Not keeping up with trends and having a history of increasing wages at a slower pace than the market indicates contributes to paycompression.

Key to remember: Employers who raise wages to attract new talent, but don't keep up with wage trends for existing employees risk pay compression which can decrease employee morale and increase turnover.

About the author
Judy Kneiszel - Human Resources Editor

Judy is an Associate Editor on the Human Resources Publishing Team and she specializes in issues such as recruiting and hiring, onboarding and training, employee communication and discipline, managing problems, team building, inclusion, employee retention, and labor relations

Expert Help Icon

Have a compliance question for Judy? The J. J. Keller Expert Help tool provides you direct access to Judy and other trusted experts to help answer your toughest compliance questions.