Pay Compression and Senior Employees

As a follow up to my earlier blog on pay compression, let’s talk about its impact on longer-tenured employees.

One major challenge that many organizations face is attracting new, desired talent. We all know that compensation for new hires is determined by the external job market. Pay compression occurs when new employees entering the organization are paid at similar or higher levels to existing employees. Because current employees have their wages set by an “internal” job market, typically their salaries are not keeping pace with the “external” market.

As new employees are bought in, the question arises: Why aren’t we increasing the compensation of the older employees in line with those of the new employees? The older employees are quite often tasked with providing on-the-job training/mentoring of the new employees. Is a workplace conducive to the spirit of teamwork and harmony when the new employees are taking home more than the old?

Of concern are those employees whose salaries are significantly below the external job market wages (for their skills and experience), and who may begin to seek other job alternatives outside the organization. Sometimes a market starting salary increases so much that the existing employee is punished by not moving. The question then becomes “to get a good raise, do I need to quit?” Employees will be more likely to see opportunities for increasing their salaries outside their present organization.

As an employer, a possible solution is to adjust your “internal job market” salaries based solely on job values and performance (and always ensure that you audit for non-discrimination). Change your terminology from “merit increases” to “adjustments.” If the pay compression is simply one of timing due to changes within the organization, communicate with the employee! Let the employee know that the inequity is only temporary and will disappear shortly.

While we won’t be able to win them all, we may be able to reduce the damage if we take the proper steps.