Internal Pay Compression Important

Friday, December 13, 2013

 

According to WorldatWork, the human resources association for professionals and organizations, market pricing jobs remains the most frequently used method for job evaluation in organizations today.  Compared to other methods of evaluating jobs, market pricing is relatively simple and inexpensive.  However, after years of salary freezes, minimal salary increases, and job consolidations, should organizations be concerned about the impact of pay compression within job classifications?

 

Internal pay compression occurs when cohorts within the same job classification are paid very similar rates but have very dissimilar skill and/or experience levels.  Rates are compressed as new hires, with little or no experience, enter the classification while existing incumbents, with significant experience, have had their rates frozen or have received only minimal increases over time.  Compression may also occur when an individual contributor approaches the pay level of their immediate manager.  A significant and contributory factor in recent years has been the suspension or radical reduction of annual pay increases by many organizations for large numbers of employees.  This stagnation of wages has resulted in a flattening of pay variation within most salary ranges and thus increased the likelihood of compression.

 

Pay compression becomes an issue for an organization’s talent acquisition and management efforts when top performing employees perceive their efforts will go unrewarded and new hires enter the organization at or near the top performer’s pay level.  While it is easy for an employer to pronounce that workers should not have “expectations” of automatic pay increases, employees do have expectations their individual efforts beyond the standard will be rewarded.  Compression has the ability to have a significant impact on employee morale and productivity, even in down economic times.  By failing to reward their best employees, organizations risk the possibility of increased turnover among their top talent.

 

The solution for pay compression appears to be very simple, raise employees’ pay.  Unfortunately, all that may do is to perpetuate the issue for the same group of employees or generate compression issues for a whole new group of workers.  Organizational redesign might also sound like a solution.  However, creating advancement opportunities where there are no valid organizational needs also creates its own unique set of future problems.

 

Jim Kochanski and Yelena Stiles, at Sibson Consulting, a The Segal Group, writing for SHRM, the Society for Human Resource Management recommend several long term solutions to pay compression in their July 19, 2013 article, “Put a Lid onSalary Compression Before It Boils Over”.

• Look for high-potential external candidates ... ready to move up into the job and will see it as a promotion.

• Control pay both from an HR policy standpoint and from a budgetary standpoint.

• Limit how high within a range new hires can be paid.

• Require a review of equity adjustments for incumbents if new hires are brought in at higher salaries.

• Institute transparency across units, either before or even after compensation actions are taken.

• Institute calibration across units.