Pay compression is the concept in an organization where the employees have more or less a similar salary irrespective of their age, experience, profile etc.
Even those employees who have a better skill set or have been with the company longer, have a slightly higher salary package.
The major problem of this phenomenon is increased turnover where the long term employees feel a sense of inequity and walk away from the organisation with all the knowledge and expertise they have acquired over a period of time.
In order to tackle this, most organisations follow the method of “equity” adjustments only for selected highly valued employees who are a victim of pay compression.
Pay Compression comes in many forms.
At its very root, pay compression refers to a situation where pay isn’t differentiated enough (i.e.: compressed) where maybe it should be and for a very compelling reason. When pay compression is present, you may find that your employee morale or engagement takes a dip, leading to a dip in performance and business results. Their “sense of fairness” alarm may go off and rebuilding trust with employees at that point takes much more time and effort than getting it right the first time.
There are 3 common types of compression that deserve further examination within every organization.
Am I hiring people in too close to or higher than existing employees in the same role? Pay compression in this case refers to bringing in new talent at a rate that is near or even above (also called inversion) employees who have much more experience in the role and often much more tenure in the organization. Sometimes you just have to have that newest brightest talent. Unfortunately, that can sometimes come at the cost of paying competitively for your existing talent.
Am I paying managers less than those they manage (unless that’s right for the role)? Pay compression in this case refers to managers being paid at a rate lower than those that they supervise. This may make sense in some technical roles where the market values the individual technical skills higher than management skills. In most functional areas, however, it’s challenging to motivate a manager when they are being paid less than those they supervise. As we move into an era where more millennials are entering management roles, this type of compression is especially troublesome.
Am I paying multiple levels of a job essentially the same thing? Do you have an Admin Assistant 1, Admin Asst 2, and Admin Asst 3? If so, are there clear differences between each level of the job? I’ve worked with many organizations that fail to differentiate the jobs, merely creating multiple levels so they can create a sense of mobility. While it’s true that millennials, and in fact most other employees as well, like to be promoted, they also want to feel a substantive change to both the nature of the job and the compensation associated with it as well.