Wage compression, also known as pay or salary compression, occurs when there is a slight difference in pay between employees, regardless of their skills, experience, or seniority. It can happen when new hires receive the same pay as a experienced employees for the same job.
Wage compression can be a pay equity issue and can cause rifts in the workforce. It can also impact company morale when a new employee is compensated as much as a long-time manager.
How is Wage Compression different from Pay Compression?
Pay compression occurs when a new employee is compensated the same as or more than a longer-service employee in the same role. For example, a new hire with little experience earns more (for the same job) than an employee who has been with the company for years.
Pay compression can also occur when one job family has multiple levels of a job function with distinct roles and responsibilities, but everyone is compensated using the same salary range. For example, if a company has three distinct levels of accountants, each should have its own unique salary range.
Why is it Important to Address Wage Compression?
Addressing wage compression is an employee retention strategy. If your best employees can take their talent to other places at a higher compensation level, you always have a chance of losing them.
According to a 2022 survey by Robert Half, “56% of organizations experienced pay or wage compression in the last year. And with rising inflation rates, salaries for incoming candidates might be rising, too.”
Strategies to Fight Wage Compression:
There are a few things that businesses can do to combat the wage compression phenomena. Our sister company AUI wrote a great article on this in December of 2021 you can read it HERE.
Calculating Compression:
Wage Compression can lead to increased turnover and discontent among workers. To stay ahead of pay discontent, a set formula exists to calculate wage compression.
Salary.com says that wage compression “may be calculated as the actual salary of an employee divided by the midpoint of the salary range. This number is then multiplied by one hundred to get the compensation range percentage.”
Key Factors for Wage Compression:
- Salary Ranges: Determine the salary range within your organization for different job levels or positions. This range typically includes a minimum and maximum salary or a salary band.
- Evaluate Pay Grades: Identify the different pay grades or levels within your organization. These levels may be based on job titles, responsibilities, experience, or qualifications.
- Consider Experience and Qualifications: Look at the variations of various levels in experience, skills, and qualifications among your employees. Employees with more experience or higher qualifications often command higher salaries. Analyze whether the are significant gaps in compensation based on these factors.
- Cost of Living: Consider the cost of living in the region where your organization operates. If the cost of living is high, it may be necessary to adjust salaries.
What Does it Mean for Employers?
Employers need to be vigilant in reviewing the salaries of various positions and the distinct experience levels in each position. Measuring the ratio or percentage difference between experience-based pay classifications will be a good starting point to decide how wage compression is affecting your organization.
Another tool to use to determine wage compression is to evaluate your local market. Conducting salary surveys can pay huge dividends not only in discovering the average ratio between experience-based pay classification in your market, but also in attracting and retaining the best talent.
- Internal Equity: Assess the internal equity within your organization by comparing the salaries of employees within the same job level or pay grade. Look for any significant differences or disparities that indicate wage compression.
- Budget Constraints: Consider the financial constraints of your business. Assess if the budget allows for salary adjustments to address wage compression without adversely affecting other aspects of your company.
- Performance Evaluation: Evaluate the performance of each employee and determine if there is a correlation between performance and compensation.
How Can ClarityHR Help You with a Wage Compression Strategy?
At ClarityHR we believe that your people and culture are a big part of why people work for you. Management has a massive impact on the cultural experience of your business. Wage Compression is one of many crucial factors. ClarityHR has the experience and the tools to simplify the complex issues around wage compression. We can help you develop a wage compression avoidance strategy that will improve current employee morale and attract the right talent to your organization. Click Here to get started.
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