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WAGE COMPRESSION


With all of the new focus on salary transparency, it has us asking the question; what about wage compression? In this newsletter we are looking at what wage compression is and what can be done about it.

 
WHAT IS PAY COMPRESSION?

"Pay compression, also known as wage compression or salary compression, occurs when employees with significantly different skill sets or experience levels have nominal differences in pay. Pay compression can happen, for example, when a new hire is paid more than (or close to) the rate of an employee who has been in the job for a long time. Pay compression is usually an unintended consequence due to outside forces, such as a merger of two companies, federal or state minimum wage increases, or rapid inflation. That said, a company’s internal pay structure can also contribute to pay compression. This can happen when starting salaries are set too close to the wages of existing workers. An organization desperate to attract talent may boost compensation to make an offer more enticing in a competitive job market, but they may not have the room to increase pay for existing employees." Learn more


WHAT EVERY EMPLOYER NEEDS TO KNOW ABOUT PAY COMPRESSION

"When the job market is as competitive as it is today, many employers find they need to up the ante to attract top talent. This often means increasing compensation. However, bringing in new hires at starting salaries higher than or close to what existing employees are making in similar roles can lead to pay compression. This is when salaries don't properly reflect employees' skills, professional experience or their role's responsibilities. Pay compression may also happen when a newly promoted worker makes more than their colleagues at the same level or when nonexempt or hourly employees earn more than their supervisors due to overtime pay.


Regardless of where pay compression is occurring in your organization, if not addressed properly, it can negatively impact your workforce by lowering staff morale, decreasing engagement and driving turnover." Learn more


IS PAY COMPRESSION COSTING YOU?

"Over the past few volatile years, the war for talent has meant that companies will often prioritize hiring at any cost. While many have increased salaries for new hires, few gave corresponding increases to current employees—giving rise to a compensation issue called pay compression.


Pay compression is what happens when there is little difference between the wages earned by a tenured employee and newcomer, or between a junior- and senior-level employee working within the same job family. If left unchecked, pay compression can lead to higher turnover, lower productivity and the erosion of employee morale and organizational trust. But as we move into an economic downturn, with a greater emphasis on capital efficiency and cost reduction, many companies are encountering a difficult challenge: How can we remediate pay compression problems without an ample budget to give out pay increases?" Learn more


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