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By: Kathryn Gombos on June 27th, 2019

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How to Avoid Pay Compression Problems

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Many business leaders will agree that people are your most valuable asset and while this intuitively makes a lot of sense, organizations still struggle with their human capital strategy.  In today’s United States job market, with low unemployment rates, it is important for HR to be a strategic thought partner to business leaders, ensuring that your most valuable asset, your people, are aligned with business goals. 

Most businesses have experienced at least one of the following scenarios:

  1. New hires are being paid the same as or more than current workers in the same position. 
  2. The pay difference between the current worker’s position and a promotion into the next level is not significant enough to incentivize the increased level of responsibility.
  3. Minimal pay difference between a manager and their direct reports.
  4. Employees in lower-level jobs are paid almost as much as their colleagues in higher-level jobs.
  5. Non-exempt workers, who log overtime, are making more than an exempt role that is considered a peer position.
  6. “Hot skills” jobs in the labor market demands higher starting salaries to attract talent.

Have you? These are all examples of pay compression. 

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What is Pay Compression?

Pay compression is when you have small differences in compensation regardless of experience, skills, job level, or tenure. In this time of increasing connectivity and transparency, it is important to recognize that employees will become aware of inequitable pay practices. 

Problems Created by Pay Compression

Salary compression has serious business implications. Pay compression can lead to problems such as:

  • increased turnover
  • a decrease in discretionary effort
  • and even potential discrimination and pay equity claims. 

Being strategic, fiscally responsible and deliberate with your compensation decisions is extremely important, especially in today’s market. 

How to Address Pay Compression

So then, how do we address pay compression challenges? First, identify the cause of pay compression in your organization.  Through your research and understanding of the cause, you can best determine the appropriate course of action. 

You can:

  1. Review jobs and job descriptions to determine if the duties are an accurate representation of the work being done.
  2. Review the organization’s compensation philosophy.
  3. Review midpoint progression in your pay structure.
  4. Review salary survey data to determine market rates and adjustments annually.
  5. Review overtime eligibility and scheduling
  6. Review performance management and merit pay

At the same time, it is equally important to understand that compression is a symptom of poor compensation program planning.  It is always a good idea to review your compensation program to ensure your pay practices are the best solution for your organization’s talent needs.

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