I have the opportunity to work each fall with a large manufacturers association - my firm conducts a comprehensive compensation and benefits survey for their members - and I recently met with them to discuss what is on the minds of their members as we plan the 2019 survey effort. Two things: hiring and salary compression.
Having worked in this field through a few upturns and downturns, it has always struck me that compensation trends seem to lag what happens in the economy and labor market. Six months, a year, sometimes longer. The reasons why aren't entirely clear to me (some of our smarter readers may have thoughts and theories about this). It may be that reality takes some time to impact our sometimes impenetrable salary budgeting processes. Regardless, I'm seeing news now from many corners and perspectives (from Slate to CNBC to the Wall Street Journal) that the wage stasis has finally shifted and we are seeing real gains.
What does that mean for us, who labor in Human Resources and Compensation? I think it means that those of us who aren't immersed in staffing need to start working on compression prevention and remediation.
Some background for those new to the phrase "salary compression." It refers to the situation where there is an insufficient or even inverted salary difference between new hires and their more seasoned, more tenured counterparts. Compression happens for many reasons, but probably the classic scenario (and what, back to my opening paragraphy, many manufacturers and other employers are experiencing now) is when a tight labor market compels employers to hire new talent in at salary levels near (or even above) the salaries of current experienced employees. Internal equity considerations are pushed aside – at least temporarily – to get needed talent in the door.
You know that compression is becoming a problem when employees tell you that “the way to make more money here is to quit and then get re-hired,” and then a number of them do just that to prove the point.
The most common “cure” I see applied to salary compression is to make select adjustments as necessary to restore an appropriate sense of equity between the salaries of new and more experienced employees. This is a sound approach for the occasional compression problems that crop up in every organization. But when salary compression becomes a more widespread problem, it’s time to take preventative action.
Most of the time, a widespread salary compression problem can be traced back to a salary structure and salary increase policy that have become out of step with the market. When your salary program is no longer in sync with the realities of the labor market, then chances are good that the salary levels of your employees are out of sync as well. Often this has its roots in a previous era of sluggish job growth, which can lull many a company into complacency when it comes to reviewing and updating their pay program and practices. Reality hits hard when things turn – sometimes abruptly – and you must go out and recruit new people to the company. You are then forced to scurry in with adjustments that are often too late and too begrudgingly given to have the necessary impact.
Certainly it’s an option to just continue to address these compression issues on an ad hoc basis, simply making salary adjustments when and where we need them. But I would submit that it isn’t a good use of your available salary dollars or a smart HR practice. Reactive salary expenditures never bring the same ROI – in terms of employees’ hearts and minds – as proactive salary expenditures. Proactive salary dollars, particularly when they are delivered as part of a strong, market-competitive and well-designed pay program, deliver the message that you value employees and are willing to reward them competitively for their efforts and results. Reactive dollars, on the other hand, say that you are acknowledging and fixing a problem (a problem, by the way, that many employees will assume you willingly allowed to happen).
You’ve undoubtedly heard the old saying that an ounce of prevention can be worth a pound of cure. I think this is true for the problem of salary compression. Are you encountering this yet in your organization? And, if so, what steps are you taking to address it?
Ann Bares is the Founder and Editor of Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting and survey administration 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
Love this! I’ve been fascinated with this topic and I appreciate your perspective!
Posted by: Joe | 11/09/2018 at 11:25 AM
Thanks Joe - great to hear from you!
Posted by: Ann Bares | 11/09/2018 at 11:47 AM
I believe some salary compression is warranted. I've never understood why we base all compensation on percentages. . . this leads to the opposite of compression and happens in periods of diminished labor demands. The compression is a correction. Additionally, many college grad hires have skills needed for technology advancement in many industries, skills the experienced hire may or may not have. This warrants the premium salaries being paid to graduates, but does not warrant adjustments to all.
Posted by: Deb Alexander | 11/15/2018 at 07:26 AM
Thanks for the great comments and observations, Deb. Agree that sometimes the salary squeeze between new hires and tenured employees that raises the compression alert can be entirely appropriate - especially in situations where the premium salaries reflect new skills and tech acumen which the company now needs and experienced employees may not have. HR and compensation pros need to ensure they understand the circumstances around compression "issues" before suggesting/approving pay adjustments - as the differentials may indeed be entirely appropriate. And then, there is the thoughtful and honest communication to those involved/impacted which must happen.
Appreciate your reading and commenting!
Posted by: Ann Bares | 11/15/2018 at 01:08 PM
At my organization we use the term salary compression to refer to a low/diminishing wage gap between an employee and their supervisor, possibly due to union increases being higher than increases for exempt employees, or job reclassifications. Does anyone else refer to salary compression this way?
Posted by: Amber Broda | 11/23/2018 at 11:25 AM
Hi Amber,
I have also heard the term salary compression used in that way. It used to be - particularly in the manufacturing sector - a frequent issue/consideration, as it was important to assume that there was a sufficient premium offered for the additional duties associated with being a supervisor. It may be that we simply appropriated the term as labor market cycles (ups and downs) became more dynamic and the new hire/experienced employee pay squeeze became a thing.
Thanks for raising the question and calling attention to this. I'll be interested to hear if others also use the phrase in this way.
Posted by: Ann Bares | 11/23/2018 at 01:49 PM