Avoiding the risks of salary compression at workpaces

IN our experience, most employers want to pay their employees fairly. Pay compression occurs when new employees are paid the same as or more than old workers in the same position. When the pay difference between employee levels shrink, higher-level workers feel that their pay advantage is no longer significant. Pay compression can lead to employee disengagement, unproductive turnover, or even lawsuits.

The problem of salary compression

Providing a higher starting wage to new entry-level workers rarely poses a problem for those workers. But consider the staff who started before the wage was raised. Most of them had to work hard over a significant period of time in order to earn raises. When new staff comes in the organisation with no experience yet earn just as much as more-tenured staff, it can feel like the hard work and experience of those who have been around longer is not valued. Salary compression is a serious issue and may lead to decreased turnover, productivity problems, dissatisfied employees, lack of engagement and even potential discrimination, thus affecting the organisation at large.

What is salary compression? Salary compression is when you have small differences in pay at workplaces regardless of experience, skills, level or seniority. This is normally noticed when salaries for your new employees in a particular job title are too close to the wages of your existing workers. Salary compression can also occur when the pay levels within an organisation start to converge, and there is less and less variation for things like years of experience and levels of education. In most organisations, due to how the employee joined the organisation, the salary of the new employee will be equal to or more than a senior employee’s in the same position.

Why is employee compensation important?

It is key as an organisation to develop a strong and clear strategy on how employees are compensated for their work. However, there is more to it than just ensuring that everyone is fairly compensated. A comprehensive strategy should give employees insight into why their contributions are valued and align them with their job roles.

With a clear understanding of what their jobs are, why they are important, and how much value they bring, employees are motivated to continue working hard. Your employee compensation strategy should also create a structure for how employees can grow in their role and do more for your organisation.

Effects of salary compression Salary compression can be seen on a one-to-one level or across entire organisations and it is inevitable in most organisations, but can be managed. Those whose pay is compressed, or are earning less, are likely to be affected by low morale thus affecting productivity. It does not make sense to continue working hard when your efforts are not being fairly compensated compared to others.

This can lead to a more noticeable problem of poor performance, which will, therefore, ultimately affect everyone at the workplace. Pay compression can cause problems for employers. For example, it can lead to a high turnover if employees feel they are being undervalued by not being paid more than new employees.

This is especially troublesome when the best employees decide to move on. Salary compression is unfair to loyal employees as it saps morale and leads to resentment among colleagues at the workplace, as well as compelling employees to look for work elsewhere.

It is very crucial to note that salary compression can present serious problems that eventually lead to an organisation losing some of its most talented employees. Avoiding pay compression is critical to retain long-term employees and keep them satisfied and motivated. If it becomes known to employees that new employees are earning the same salary as long-term employees, that can cause frustration, resentment and even turnover. Although many organisations have carelessly allowed salary compression to take root, there are actions they can take now and, in the future, to avoid recurrence.

Measures to avoid pay compression Employers must communicate their organisation’s compensation philosophy, strategy and practices, so that employees comprehend how their pay is determined. Your compensation may be fair, more than fair. But if employees do not know or see it that way, engagement will suffer.

Employers must explain full benefits, partial benefits and how the salaries are structured so as to avoid disgruntlement at workplaces. Employers should also provide in-depth training for all managers on their compensation philosophy, strategy and practices so that they do not quickly make hiring decisions that may result in salary compression.

If you think that employees do not know how much their co-workers earn, think again. More than a third of organisations said that pay transparency was a matter of concern at their organisation.

Millennials share salary information with their colleagues. It will be bad for the employer when employees find out, either first or secondhand, that they are being unfairly paid. This can be called salary discrimination.