It’s out there, slowing chipping away at the corporate culture it took years to cultivate, stealing your most valued, tenured employees and choking off employees’ morale. Most employers don’t realize it exists until it is too late and, even then, may struggle to pinpoint the culprit – wage compression. While wage or salary compression isn’t new, the current labor market is a fertile breeding ground for it to take hold causing major issues among your employees. Let’s examine wage compression, how it affects companies and how to combat it.
What is Wage Compression?
Wage compression, also known as salary or pay compression, occurs when newly hired, less experienced employees earn close or equal to the salaries of current employees. For example, an employee hired 10 years ago came on board with a starting salary commensurate with the market rate at that time. Over time, the employee gained knowledge and experience, proved herself to her superiors, met or exceeded performance expectations and earned raises in step with the company’s compensation system. Fast forward to January 2022 as the world slowly emerges from the devastating omicron variant while still reeling from the previous two years of dealing with a pandemic. Suddenly, business has picked up, the economy is rebounding, and employers are ready to refortify their ranks with talented employees. It may not be that simple. Dealing and living with the pandemic over the past few years has fundamentally changed the way employees think about their personal and work lives. Employees have left their jobs in droves in search of better salaries and benefits, and some have left the marketplace entirely, creating a very tight labor market. The current labor market has outpaced the salary increases of many companies. To recruit and hire the employees businesses need to operate, companies are offering enhanced benefits and much higher starting salaries. In the example mentioned above, a new hire may be making the same salary as the 10-year employee. In some cases, the situation can result in wage inversion in which new employees earn more than more tenured and experienced employees.
What Causes Wage Compression?
As mentioned, the major driving force of wage compression is a tight labor market. However, increases to minimum wage or lack of standardized pay practices may be the culprit. In the later situation, new hires willing to demand specific starting salaries or increases may be more likely to receive them while other, more tenured employees fall to the bottom of the salary range for their position, increasing the likelihood for compression.
How Does Wage Compression Affect a Company?
Corporate Culture
Learning that a colleague with less experience and/or tenure is earning close to or as much as you has major cultural implications. With younger employees more willing to discuss pay with colleagues, pay disparities are easily revealed, accelerating the effects of wage compression on corporate culture. A sense of unfairness permeates the work environment leading to increased turnover and, in some cases, charges of discrimination. Remember, under the National Labor Relations Act, employees have the right to discuss working conditions, which includes compensation. Therefore, it is illegal to have a policy prohibiting discussion of wages.
Potential Discrimination Charges
While it isn’t necessarily illegal to pay one employee more than another in a job class, doing so among employees performing similar work can open an employer to liability. The underpaid employee could believe the reason the pay disparity exists is because of their race, gender, sexual orientation, etc. Even if the employee fails to prevail in a lawsuit, the damage is done as knowledge of the lawsuit creates a perception among other employees the employer is engaging in unfair labor practices. Once that seed is planted, it becomes imbedded and grows making it very difficult for the employer to dispel the perception. This has a major impact on employee morale.
What are Some Ways to Combat Wage Compression?
There are many actions employers can take to relieve wage compression. Among them are:
- Understand and stay on top of market conditions. Companies must know the “going rate” for all positions in the company. There are numerous online resources to help companies maintain competitive salaries such as salary.com and payscale.com. HR consulting firms can also provide detailed salary surveys specific to geography, industry, and company size.
- Conduct annual compensation audits. Market conditions can change quickly. Annual compensation audits can reveal whether employees are appropriately placed in a pay range based upon their experience, education and tenure with the company. In an audit analyzing current pay practices, consider the following questions: Are current compensation practices in line with market demand? Has the minimum wage recently increased where business is conducted? Are there obvious pay disparities among employees in the same job families? Is the current compensation structure in support of and in alignment with the company’s goals and vision? If an audit reveals large pay disparities, they can be addressed with immediate pay adjustments or incremental ones out of cycle with the normal annual raises.
- Offer hiring bonuses to new employees rather than a higher salary. Hiring or signing bonuses can be very useful in attracting talent in a tight labor market. When used instead of a higher starting salary, the risk of wage compression is minimized.
- Offer non-monetary benefits. If, after conducting a compensation audit, large pay disparities are found, and there’s no budget for raises, consider offering other benefits to employees. Careful thought should be given to benefits the workforce finds valuable as these can differ significantly among age groups and other demographics. Some ideas are tuition reimbursement, pet insurance, more PTO, flexible work arrangements, financial planning services, mental health coverage and wellness programs.
- Provide existing staff with spot bonuses. On-the-spot bonuses serve multiple purposes including lessening pay disparities among employees in job groups. Spot bonuses are usually less costly to employers than year-end bonuses, improve morale, serve as a retention tool and increase productivity.
- Be transparent. If pay inequities exist, show staff that corporate leadership is addressing the situation by implementing pay structure changes.
Get Smart HR
Of the many HR challenges companies face, having the right compensation practices is among the most difficult. Ignoring wage compression in your organization can cause resentment among more tenured but lower paid employees leading to morale issues and possible turnover. You can attract and hire good new talent while simultaneously taking measures to dampen wage compression. If you are unsure whether wage compression exists in your company, Smart HR can conduct a comprehensive audit of your compensation structure and practices for answers. If wage compression is identified, Smart HR will provide specific actions and a roadmap forward for your company to minimize or eliminate it. Call today.
