Pay compression occurs when you have small differences in pay regarding experience, skills, level or seniority. Most often employers are unaware that pay compression exists until a problem arises.
Some examples of pay compression are:
- Newly hired “green employees” are paid more than existing employee in same position;
- A subordinate is paid more than or equal to his/her boss;
- The salary of an employee in a lower graded job is paid more than employee in higher.
Employees are concerned with how their compensation levels relate to that received by others in an organization. And further, that their pay is a reflection of their performance and abilities. If an employee believes this his/her contribution to an organization is undervalued, this can lead to emotional issues such as resentment, depression or disengagement. Another factor to consider is a subordinate earning more than his/her supervisor may not respect their supervisor if s/he is aware of the salary compression.
While there are other issues such as tenure-based pay, general increases, etc., that create pay compression, oftentimes pay compression is the result of a poorly maintained salary structure. Is there a solution? Yes. Establish a salary structure. Ensure it is updated regularly and use it as a guide when setting compensation levels. Take steps to benchmark your salaries regularly to keep pace with market rates. If your salary program is not in sync with your market, my bet is that your employee salary levels are as well.
In closing, a word of caution. There are potential legal issues associated with pay compression. These may arise when a protected class is at the wrong end of a pay compression issue.
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