For a lot of people, talking about compensation is an uncomfortable conversation to have. There are some faux pas around it in the workplace, though some normality has arisen around the subject (especially now that some states are required to share salary ranges by law). When it comes to HR and people operations teams though, the topic of compensation can’t be avoided. If companies want to stay competitive and attract the best talent, they have to communicate to build attractive compensation structures, and they have to learn how to fix salary compression.
Salary compression isn’t a term that’s used a lot among workers, but it’s an important term for HR, senior leadership, and the heads of organizations. In this blog post we’ll take a look at why it matters, what it means, and how having compressed salaries can impact your organization and cause problems with workers. We know money and compensation aren’t the easiest topics, but it’s oftentimes the case that the most difficult conversations in the workplace are the ones that are the most important to solve and keep an eye on.
Understanding salary compression
You’ll often hear salary compression used interchangeably with pay or wage compression, because the three words are shared to explain the same set of circumstances. To start with a definition, salary compression is when there isn’t much of a difference in pay for people across different lines of a business. This means that people with varying skills, knowledge, experience, or track records for results are all getting paid close to the same amount of money.
Salary compression can happen in all types of companies, large or small. The newest of startups, the small business down the street, and established institutional firms can all be found guilty of compressed salaries. These problems with salaries can also arise in some groups within an organization and not others. We’ll discuss more about what issues can be caused by compressed salaries later, but as an anecdote, it’s important to remember that many workers were leaving their jobs during the Great Resignation for higher paying roles.
Some common causes of salary compression are when new workers join a company and are paid the same—or close to the same—as seasoned workers and employees who have been at the company for a long time. It can also happen when there isn’t a big enough gap for the amount of pay between managers and the workers that are reporting to them. These problems are of course exacerbated and further brought to light if workers hear about compression at their company.
Why does salary compression matter?
Before you start talking about how to fix salary compression, it’s important to understand why it matters and what problems it can cause. One of the first, and possibly obvious reasons, is that it can lead to unhappy workers that want to leave a company for an organization with better pay structures. That isn’t the only one though. Below are some of the common issues that can arise from salary compression:
- Turnover—If workers are unhappy with the amount of money they’re making, it’s possible they’ll look for a new place to work. This unhappiness may be exacerbated by hearing about coworkers or peers in similar roles that are making much more money than they are. Some employees are also more willing to be more patient about workplace issues if they’re happy with compensation. While that doesn’t mean you should ignore workplace problems, it does highlight how much compensation matters.
- Acquiring talent—Whether we’re in an ordinary worker’s market or a heated up and competitive one like we are now, candidates talk to each other and share notes on companies they’re interviewing with. There are also review sites and online forums to give the scoop on interview processes and experiences at companies. If workers hear that some companies pay less or have worse compensation structures than others, those companies could place an unnecessary burden on their hiring efforts and be sending talent elsewhere.
- Company culture and internal morale—Getting along and feeling valued in the workplace isn’t just about the relationships and work that occupy the daily lives of employees. Another important factor in feeling valued is knowing that a company is paying adequately compared to peers and competitors in other industries. If workers hear that this isn’t the case, it’s possible that their morale will slip and they’ll feel less motivated to give it their all. This is especially likely if a job is stressful.
All these scenarios are no good for organizations, but they can be avoided by staying on top of your pay structures and keeping an eye out on salary compression. Of course, companies should never promise or try to give more compensation than their budgets and resources allow.
Are there common causes of salary compression?
Before finding out how to fix salary compression, it’s important to recognize what some common causes may be. Some usual suspects are:
- An increased cost of living that starts to affect salaries
- Raised salaries across industries with companies not being able to match them
- Poor management of salary structures and job families over time
It’s also possible that a higher influx of workers at new market rates will impact compression and salaries across your company. And now that workers are more empowered and open than ever, they’re much more likely to speak out about discrepancies and unfair practices. Worker awareness and employees having a voice means we’ve made great progress, but it’s ideal for companies to recognize problems long before workers do.
While the causes are multifactorial, not keeping an eye on potential problems through employee engagement programs, industry research, and by auditing company job roles and families can raise the likelihood of running into salary compression and the problems that come with it. A lot has been written about causes elsewhere, and while it’s important, we want to spend some time now going further into the details on prevention tactics.
How to fix salary compression
There isn’t a one-size fits all solution to salary compression and you aren’t going to solve it overnight. There are, however, steps that you can take to make sure that you’re aware of compression possibilities and to be actively organizing your company to avoid them. Here are some things you can do:
- Take a look at your current pay structures—Make sure that the pay and bonus structures that you’re offering to new hires and seasoned employees are competitive in your segment of the market. Also consider other factors like inflation, cost of living, possible commute costs for workers, and even economic pressures like pandemics or interest rate hikes.
- Don’t stretch yourself thin—Sometimes when companies have plenty of cash flow they over hire instead of using their additional resources on the staff they already have. Always make sure that your current people are fairly compensated and have the right amount of work and resources, then hire when necessary.
- Make sure HR is working with finance and recruiting—One way that salary compression develops is when HR, finance, and recruiting teams aren’t talking with one another. HR and recruiting have to let finance teams know the salary ranges for future talent, and finance has to share budgets and constraints. Through these conversations the teams can come to compromises and find solutions for making sure the budget is ready to accommodate the talent that companies need.
- Focus on inclusion and being a diverse organization—It should be a given not to discriminate based on race, sex, religion, gender identity, political affiliation, or any other individual criteria. If workers and people in an industry catch wind that a company is paying people differently based on individual circumstances, they’ll lose talent and their reputation. They may even face legal consequences. All of this is also aside from the fact that discriminatory pay and salary compression related to it is morally and ethically wrong. Always strive to be an organization that prioritizes diversity, equity, inclusion, and belonging.
- Align your pay with the marketplace—Always be in tune with industry trends for pay and job roles. Conduct research, talk to peers that you have in your industry, and never be caught off guard by having outdated expectations on pay and bonuses.
- List salary ranges—In some cities and states this practice is required by law. Even if it’s not required where you are, it’s a helpful way to keep a public eye on compression and to give potential workers knowledge of your salary range compared to competitors. Listing your range will signal to your workers that you’re transparent, and they’ll also be more comfortable in the interview process by knowing what they’re applying for upfront rather than having to find out in the later stages of interviewing.
If you’re a small company, some of your approaches for how to fix salary compression may be different based on your resources and budgets. You can still find other ways to avoid compression or satisfy workers. Some ways may not even include pay.
In these scenarios, think about how you can give workers flexibility with remote work or unique hours, see if you can provide equity or competitive stock options, and even consider promotions or unique bonus structures.
If you’re a small business that’s approaching compensation differently, always remember to use employee engagement surveying to make sure your workers are pleased with the approaches that you’re taking. Then you’ll be able to adjust if needed.
Want to learn more about compensation through employee surveying?
Workify is here to help. Whether you’ve already launched an employee engagement program or just want to refine yours, we can make sure your surveys are accounting for compensation and employee benefits data.
Our programs and surveys are backed by I/O psychologists and our team of specialists will help you navigate our Engagement Intelligence Platform so that you understand all of your data and know what to do with it. Connect with us today to learn more and get started.