Pay Equity + Rising Minimum Wage = Tight Squeeze of Wage Compression

Article contributed by Barbara Piucci

It is certainly taking more of our time and budgets to find and retain employees as we enter the summer months of 2021. The relaxing of COVID-19 restrictions in the workplace raises more questions than provides answers right now. The fight for talent is quickly increasing pay rates and causing pressure on incumbent pay.

Wage compression occurs when pay differentials are too small to be considered equitable. Compression can happen for many different reasons. Rising minimum wage rates contribute to pay compression. It can occur between supervisors and subordinates, or experienced employees versus newly hired employees. For all reasons, wage compression causes low morale and high turnover. 

There are several issues to consider before jumping to a solution. Consider the current use of overtime and the impact on subordinate pay. If this is a scenario causing pay compression for you now, how long do you expect it to continue? Is it possible to rotate overtime among employees to distribute the increased pay?

Ask yourself, how effective is our merit pay system in a tight and retracting labor making? What were our merit increases during the pandemic? Have we budgeted enough for this year? Does your merit policy truly reward high performance? If not, it could be contributing to compression if the amount of increase between high and low performance is not significant enough.

Have you conducted a pay market analysis in the last year? It will show you where pay adjustments are most critically needed. Remember, EANE Members get access to 100 FREE benchmarked salary profiles to help support a strategic compensation plan for their workforces. 

Lots of questions! Wage compression is a multi-faceted issue and requires more than dollars to correct. As with all problem solving, the solution to wage compression lay in the details. Develop a compensation philosophy. Evaluate positions. Review market data. Set pay structure and midpoint differentials. These are the foundational steps in forming a competitive and equitable compensation plan to mitigate wage compression now and into the future.