2. until fairly recently, employees rarely knew if compression
existed because Traditionalists and Baby Boomers regarded
pay levels as private. During the past five years, the influx of
Millennial/Gen Y workers has rendered such discretion
a thing of the past.
looking ahead and taking steps now Experience has demonstrated that job upon learning of the pay disparity.
to deal with compression before it over the long term, companies pay The increase of a few thousand dollars
becomes a problem. the cost of ignoring problems related per year to the existing employee’s base
to salary compression. An example salary is small in comparison to what it
Penny-Wise, Pound-Foolish would be an organization that has would cost the company to recruit, hire
Salary compression occurs when one investment analyst — a loyal, and train a replacement.
there are little or no differences in smart and dedicated employee who
pay, coupled with large differences in has made the company buckets of External Influences on
responsibilities, skill level or qualifica- money through smart investments. Salary Compression
tions. The inequity may occur between The company decides to grow the Two significant influences on pay
supervisors and subordinates, between department by adding a second invest- compression have emerged in recent
new and experienced personnel in the ment analyst, who will be trained by years. The first trend is a major
same position, or between pay-range this star employee to perform the increase in salary transparency among
midpoints of successive job grades or same work. When the organization the Millennial Generation. Younger
related grades across pay structures. discovers that no qualified candidate employees’ openness about discussing
Compression is rarely a deliberate is available at the star employee’s level salary levels is a troublesome trend
compensation strategy, although (as of pay, it is forced to offer the new hire because it brings compression issues
discussed in more detail later) it may a 10-percent-higher base salary. While to the surface. Until fairly recently,
be tolerated at extremely innova- it brings that desired candidate on employees rarely knew if compression
tive companies whose culture is to board, there needs to be a related pay existed because Traditionalists and
pay whatever it takes to get the best adjustment for the existing investment Baby Boomers regarded pay levels as
talent with the latest skills. However, analyst. Since a truly stellar employee private. During the past five years,
compression should never be promoted can find a great job in any economy, the the influx of Millennial/Gen Y workers
with the intention of encouraging company should increase its incumbent has rendered such discretion a thing of
lower-performing employees to leave top performer’s base pay to exceed or the past. They have few reservations
the organization because such a at the very least match that offered to about sharing their salary informa-
strategy could damage the reputation the new hire. If not, the incumbent will tion with colleagues, friends and even
of the company. almost certainly start looking for a new strangers on the Internet. Be assured
54 workspan 12/09
3. that employees — now more than skills (e.g., programming languages one-size-fits-all approach to dealing
ever — will find out, either first- or project management certification), with compression.
or second-hand, if they are being employers will more readily offer Forty-three percent of organiza-
paid inequitably. premium pay to new employees who tions said they have completed a
The second recent external influence have rare technical expertise, even if compression-related salary adjustment
on pay compression is the July 2009 they will be performing essentially the within the past two years. Of those,
increase in the U.S. federal minimum same job as lower-paid incumbents. In 83 percent expressed satisfaction with
wage from $6.55 to $7.25 per hour. such situations, compression often is the outcome of the resulting salary
This change will create pay inequi- accepted as a lesser evil than failing to adjustments, strongly indicating that
ties in organizations that employ bring desired candidates on board. companies can effectively address and
minimum wage workers unless the Generally, the survey found ameliorate compression.
companies adjust compensation levels compression more prevalent at the Survey participants were asked
for employees who were previously individual-contributor level than to indicate how morale, retention,
earning at or slightly more than for management positions. This is productivity, work relationships and
$7.25 per hour. not surprising given that pay levels job satisfaction were affected by
among individual-contributor posi- pay compression. Figure 2 reports
A Look at Market Trends tions usually vary by 10 percent to the survey results that showed that
A May 2009 survey by Pearl Meyer & 20 percent per level, versus differences compression was judged to have the
Partners, Salary Compression Practices of upward of 30 percent at the manage- greatest impact on morale, retention
in the United States, offers insight ment level. Individual-contributor and job satisfaction — all issues closely
to companies’ experiences dealing levels generate more compression linked to excessive turnover.
with compression issues. Seventy- because their pay range midpoints are
seven organizations across a range of much closer together, offering less Avoiding Compression
industries, geographies and company leeway to differentiate pay without Changes in the economy and labor
sizes participated. leading to compression. Sixty percent shortages/surpluses are obviously not
The survey found salary compression of respondents said they do not within the control of human resources.
to be most common in the informa- address compression differently based However, companies can manage other
tion technology and engineering/ on the level of employees, suggesting internal factors related to compres-
science industries, where equipment that most organizations take a sion, such as hiring practices, merit
and skills change rapidly. Because of
such companies’ constant need for FIGuRE 2: AREAS NEGATIVELY AFFECTED BY PAY COMPRESSION
technical talent with the very latest
No Influence
WAS THE COMPRESSION-
FIGuRE 1: Low Influence
RELATED ADJuSTMENT SuCCESSFuL?
60
60% Moderate Influence
High Influence
50
50%
13.9%
2.8%
40
40%
30
30%
83%
20
20%
10
10%
Yes No Other
0
0%
Morale Retention Productivity Work Job
Relationships Satisfaction
workspan 12/09 55
4. increase programs and salary structure • Salary structures — Making appro- Salary compression often develops
guidelines. Following are some prac- priate salary structure adjustments gradually and unnoticed, catching orga-
tical approaches to preventing and each year will ensure that midpoint nizations unaware until it is expressed
addressing compression: differentials are not too narrow, in increased employee dissatisfaction
• Communication with managers — allowing for sufficient salary growth and turnover. In recent years, the
Hasty, reactive hiring decisions made from one level to the next. problem of salary compression has been
to quickly fill vacancies often result in • Market competitiveness — Keeping exacerbated by the greater willingness
salary compression. The HR depart- up-to-date on market rates helps of younger workers to share and
ment can address this issue by clearly ensure pay is competitive and the compare information about their pay
communicating the organization’s placement of positions makes sense levels, revealing possible inequities in
pay philosophy and strategy, so that within the salary structure. As the their relative compensation, seniority
management appreciates the multiple economy recovers and companies and responsibilities. As the job market
negative effects of compression in the have more cash, market adjustments begins to pick up, organizations must
workplace. (See Figure 2.) should be made for employees whose remain especially attuned to any
• Communication with employees — An pay was frozen or reduced. perception of compression and the risks
organization’s compensation philosophy • Performance-based merit awards — it poses to their ability to continue
and pay practices should not be treated Merit pay increases for top performers attracting, retaining and motivating
as a matter of interest only to manage- should be sufficiently significant not the talent they need. Rather than
ment, but promoted to all employees. to create compression. adopting a broad-brush solution,
As many companies have discovered, • Off-cycle merit adjustments — In companies can customize an effective
even the perception that people are recent years, the pay rates for new strategy that directly addresses the
being compensated unfairly can be college graduates in many disciplines concerns of valued employees before
as damaging to employee morale and has increased faster than average they become a real problem.
performance as actual pay inequity. overall merit increases, resulting in
Knowing that their employer recognizes inequities between compensation for ABout tHE AutHoR
and is employing tools and procedures new graduates and for incumbents Rebecca Manoli is a senior account manager with
to avoid problems with compression will with one or two years’ experience. Pearl Meyer & Partners. She can be reached at
reinforce employees’ confidence that Adjusting pay rates for new college rebecca.manoli@pearlmeyer.com or 508-630-1475.
their own compensation is fair. hires or other key personnel
• Sign-on bonuses — Along with throughout the year — rather than RESoURCES PLUS
serving as one of the most effective limiting changes to once annually,
For more information related to this article:
enticements for job candidates to which is the policy at many companies
accept a position quickly, sign-on — is an effective proactive approach www.worldatwork.org
bonuses reduce the potential for to avoiding salary compression. Such Type in any or all of the following
keywords or phrases on the search line:
pay compression by providing new off-cycle merit adjustments, which • Salary compression
hires with a one-time-only premium can be used at all levels in the organi- • Base pay
payout, rather than an ongoing zation, are increasingly commonplace • Salary structure.
compensation increase. for new college-graduate hires. www.worldatwork.org/bookstore
• Building Pay Structures: How-To Series
• Variable pay — Similarly, cash incen- • Lump sum merit awards — It is for the HR Professional
tives tied to performance metrics common for long-tenured incumbents • Elements of Base Pay Administration
offer high performers an opportunity to be “red circled,” or paid very highly • Planning Wage and Salary Programs
• Determining Compensation Costs:
to earn more, without creating base within the salary range, resulting How-to Series for the HR Professional.
pay compression. in salary compression if their pay www.worldatwork.org/education
• Non-monetary rewards — Programs exceeds that of incumbents in higher- • Base Pay Administration
and Pay for Performance,
like flexible work schedules, time off level positions. Lump sum merit
Certification Course: C4
to volunteer, and training and devel- awards allow employers to recognize • Compensation Fundamentals,
opment opportunities offer relatively and reward the performance of Seminar
• Regulatory Environments for
low-cost ways to enhance the total highly paid employees without Compensation Programs,
rewards package. causing compression. Certification Course: C1.
56 workspan 12/09
