Squeeze Alert! Is Wage Compression in Your Future?

One of the advantages of having worked in this field for more than 20 years is having had the opportunity to see a few downturns come and go.  While every recession is unique in its circumstances and impact, there are themes that tend to repeat themselves.  One of them is the issue of pay compression, one that inevitably rears its head as the labor market recovers.

The labor market and the job scene may be coming around at a painfully slow pace this time, but I am already hearing about wage and salary compression concerns from clients and colleagues. 

Compression, which typically shows up as an insufficient salary difference between newly hired, less experienced employees and their more seasoned, more tenured counterparts, is always with us to some degree and in some form, but it becomes particularly widespread and acute when a recovering labor market "forces" employers to hire in new talent at salary levels near - even at or above - the salaries of current peer employees.  We can all appreciate, I'm sure, the resentment of those current employees, many of whom have survived a couple of barely-keeping-it-together years of layoffs, furloughs, increased workload and frozen salaries, only to have some spanking fresh newbies come waltzing in at equal or better pay levels.

Too often, we brush aside the problem until it erupts, like a dormant volcano of ill will.  Then we scurry in with adjustments that are often too late and too begrudgingly given to have the necessary impact.

Better to be proactive.  The market is moving, albeit slowly and unevenly.  Your salary structure and salary increase practices, if you haven't been watching and maintaining them, may be falling out of step.  If your salary program is out of sync, chances are good that the salary levels of many of your employees may be as well.  Addressing that now, proactively is not only the right thing to do, it is ultimately the better way to spend your pay dollars.  Reactive salary spends never - and I mean never - generate the same ROI in the hearts and minds of your employees as proactive ones.

I know this can be an uphill sell these days.  I have had several run-ins recently with executive teams who are clinging to the belief, with the economy still struggling, that salaries are not increasing when well over half of employees nationally received increases this year and an even greater majority are planned to do so in 2011.

Make no mistake.  The squeeze is coming and it might be headed your way in 2011.

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time. Follow her on Twitter at @annbares.

Image: Creative Commons Photo "Squeeze the Middle: by accent on eclectic

Comments

[Dan Walter]

Ann, great article.

I have found that being proactive often means being creative. For companies without a lot of cash, this may mean granting additional equity grants before the job market, and stock market have completely recovered. This can allow both the company and employees to take advantage of the growth without a huge upfront cash outlay.

[A Dedicated Comp Analyst]

Yes Ann, great article.

I'm not sure if it's possible, but I would love to hear some stories of how compression has impacted various (unnamed) companies. Have you heard of anything unique that would cause executives to take notice and thus drive home this lesson?

[Joshua]

I have personally found myself in this very situation. Following an extended hiring freeze, I accepted recruiting responsibility within my business unit. Imagine my disgust when HR forwarded the offer letters that reflected hiring salaries nearing my own! I made my case and received a salary adjustment; however, I was angry that I had to discover it. It's worth noting that I'm no longer with that Fortune 500 company.

[np]

Total BS!!! If you are a 'seasoned, experienced employee' then you have been there 10+years. He bought his house for half of what it is today. ADJUST WAGES TO THE PRICE OF HOUSES!!!!!!!!!!!!!!!! AND YOU WILL SEE THAT THE NEW GUYS ARE SEVERELY UNDERPAID!!!!!!!!!!!

[E James (Jim) Brennan]

Looks like Joshua experienced "rotten equity" treatment and took a "foot-promotion". Doing the right thing belatedly and only when pressured is the wrong thing to do. Equity supplied begrudgedly wins no applause but earns bitterness instead.

Thank goodness that wages are NOT tied to home prices, as NutsyPoster suggests, or everyone's salaries would be cut. The news is filled with statistics about the high percentage of homeowners whose mortgages are "under water" (worth far less now than they originally paid).

[Ann Bares]

Dan:

The equity grant thought is a great one - thanks for the reminder that this is another strong potential tool for many organizations facing compression.

Dedicated:

Sounds like an idea for another post. Executives may not take notice until compression causes some serious blowback in the way of key staff departures (or threats of departure). It often falls to us to track, measure and report mounting compression issues - hopefully in an effort to jump ahead of the loss of morale or talent.

Joshua:

Your story is a great illustration of the importance of being proactive rather than reactive - thanks for sharing it here.

NP:

We (me and the rest of my profession) typically advise employers to pay "cost of labor" (i.e. competitive wages) rather than "cost of living", for a number of good reasons, not the least of which is the point Jim makes.

Jim:

Thank goodness indeed!