Pay Compression | The Big Squeeze!

We receive calls all the time with companies expressing concern about the pay compression they’re experiencing within their organizations.  What is pay compression?  In a nutshell, pay compression is when you find you are paying new hires at, close to or heaven forbid HIGHER than your existing employees.  Often our leadership team simply “wants the new talent whatever it costs!” UNTIL they start losing tenured employees with great institutional knowledge due to pay inequities.  Don’t be an ostrich, yes, employees do discuss their pay rates with each other!

Mergers and acquisitions often result in pay compression, it can be challenging to level out pay rates across a newly combined organization without upsetting the transition of new staff into the existing culture. 

It is difficult to say this but there is no “free-fix” for pay compression!  Here are some suggestions to combat the issue!

ONE | It is imperative that your pay rates/ranges remain current with the market.  If you’re not already doing so, you should begin to perform a full market analysis for benchmark positions at least once every two years, particularly with the rapid increase occurring with minimum wage changes.  We anticipate that the significant wage increases for entry-level positions will result in a natural escalation of median pay rates for higher-level positions in order to retain a reasonable degree of pay differential for higher skill level positions.

Be sure to look at multiple survey data points when performing market analysis.  EANE publishes an annual, comprehensive compensation survey; participants in the survey are provided a copy of the results at no cost!  If you were unable to participate you can purchase the survey as well.  Capitalize on EANE’s new partnership with Payfactors This partnership provides our member organizations with the opportunity to market price up to 100 positions at no cost!  Payfactors provides members access to data for over 5,500 positons across 150 industries.  The data is 100% employer reported data compiled by PayFactors by the acquisition of over 400 nationally based premium compensation surveys.  The Department of Labor also provides access to employer reported compensation data.  If you have not used this FREE resource you should definitely take a look at it.  It is important to note that the DOL data is 12 months old so you will need to age it to current.

Price your positions against data that aligns with your organization size, geographic location, industry whenever possible.

TWO | When designing your salary ranges set your midpoint so it aligns with the market median pay rates as reported by the salary survey data.  To avoid compression, establish ranges with a wide enough spread to reward high performers set a maximum rate for new hires.

THREE | Conduct a pay equity review and compare the educational, experiential and position qualifications of potential new hires with current incumbents in the same or comparable positions before extending an offer.  Discuss the impact of potentially losing existing employees due to pay compression.  If necessary, provide existing employees with market –based pay adjustments.

FOUR | Conduct an annual compa-ratio analysis (employee pay rate divided by your range midpoint). Examine individual compa –ratios vs performance in order to identify potential pay inequities.

Pay Compression will not fix itself.  Armed with good market data, objective analysis of current employee pay rates to the market and trends in new hire salary expectation, your leadership team will be more open to looking at budgeting to avoid or fix a pay compression issue. EANE compensation consultants are ready to assist you in the design or review of your base or variable compensation plans