Avoiding the dilemma of pay compression at workplaces

Guest Column: Emmanuel Zvada

IN as much as most employers perceive that their best employees are working hard in an organisation there is need to address some basics. Employees think about pay all the time, what they get paid matters most. When employees perceive their pay to be reasonable and fair, other things become important. Salary compression is a serious issue and may lead to increased turnover, productivity problems, dissatisfied employees, lack of engagement and even potential discrimination, thus affecting the organisations at large.

What is pay compression?

Pay compression is when you have small differences in pay at workplaces regardless of experience, skills, level or seniority. This is normally noticed when salaries for your new employees in a particular job title are too close to the wages of your existing worker. Pay compression can also occur when the pay levels within an organisation start to converge, and there is less and less variation for things like years of experience and education levels. In most organisations, due to how the employee joined the organisation, the salary of the new employee will be equal to or paid more than a senior employee in the same position.

The main causes of pay compression is when pay increases for current employees are low, but new employees are paid a higher salary to attract them. When salary compression is sustained over several years, it can be demoralising and lead to widespread employee dissatisfaction. Employers should be concerned, because salary compression can transform motivation for one or two employees into a demotivation of the entire organisation.

Effects of salary compression

Salary compression can be seen on a one to one level or across entire organisations and it is inevitable in most organisations, but can be managed. Those whose pay is compressed, or who are receiving less money, are likely to be affected by low morale thus affecting organisational productivity. It does not make sense to continue working hard when efforts are not perceived as being fairly compensated compared to others.

This can lead to a more noticeable problem of poor performance in employees, which will, therefore, ultimately affect everyone at the workplace. Pay compression can cause problems for employers. For example, it can lead to turnover if employees feel they are being undervalued by not getting paid much more than new hires. This is especially troublesome when it is the best employees who decide to move on. Salary compression is unfair to loyal employees as it saps morale and leads to resentment among colleagues at the workplace, as well as compels employees to look for other work.

It is very crucial to note that salary compression can be a serious problem that eventually causes an organisation to lose some of its most talented employees. Avoiding pay compression is critical to retain long-term employees and keep them satisfied and motivated. If it becomes known to employees that new hires are making a similar salary to long-term employees, that can cause frustration, resentment and even turnover. Although many organisations have carelessly allowed salary compression to take root, there are actions they can take now and, in the future, to keep it from reoccurring.

There are a lot of actions that can be taken by employers to reduce the chances of having extreme pay compression such as follows:

Being transparent and communicating pay actions

Employers must communicate their organisation’s compensation philosophy, strategy and practices, so that employees comprehend how their pay is determined. Your compensation may be fair, more than fair. But if employees do not know or see it that way, engagement will suffer. Employers must explain full benefits, partial benefits and how the salaries are structured so as to avoid disgruntlement at workplaces. Employers should also provide in-depth training for all managers on their compensation philosophy, strategy and practices, so that they do not quickly make hiring decisions that may result in salary compression.

If you think that employees do not know how much their coworkers earn, think again. More than a third of organisations said that pay transparency is a matter of concern at their organisation. Millennials share salary information with their colleagues, friends etc. It will be bad for the employer when employees find out, either first or secondhand, that they are being unfairly paid; this can lead to salary discrimination.

Monitor the market-based compensation surveys

Keeping up-to-date on market rates helps ensure pay is competitive and the placement of positions makes sense within the salary structure. Regularly review market rates, even when you are not hiring and adjust current employee pay to remain in alignment with what the market is doing. Market-based compensation surveys can help organisations ensure rates are in line with labour market competitors. This can assist with the establishment of internal compensation metrics that are fair enough in line with the market. More so, it can also help employers to give appropriate raises over time, even if not requested by employees, which may mean going beyond the standard cost-of-living raise in order to stay competitive.

Revisiting and rebuilding grade structure

The first thing we can do is to rebuild our grade structure, which may be responsible for “structural compression.” Learn how to fairly set up employment compensation plans, including benchmarking and research to clearly define salary and other aspects of a pay structure. It will be crucial to reward employees for good performance, believing that fair remuneration motivates employees to strive for excellence. You can also make a comparison within each salary grade by the employee’s tenure in the position. This helps to analyse disparities and adjust accordingly.

Having fair and transparent salary structures, a strategic communication plan and salaries that align with the company mission and vision as well as market values, are critical steps to keeping employees informed and satisfied. Employers who believe that they may have salary compression issues within their organisation are encouraged to review their salaries now and to make suitable corrections. Doing so now may result in fewer pay equity issues in the future.

Promote someone from within

Before bringing in new employees, carefully consider whether any current employees should also be given promotions to new positions to reflect their seniority and level in the organisation. When new hires are brought in at higher salaries or when across the board increases this will cause gaps with the existing employees so the solution will be to promote from within. In actual sense when managing compression, employees paid too high, relative to their marketplace and salary grade, should also be closely reviewed to determine if they should be considered for a promotion or managed at the next higher level.

Benefits of managing salary compression

Salary compression can and should be proactively managed. Once top management is aware of and owns the web of issues caused by salary compression, it is likely they will initiate proactive steps to resolve the issue. Managing salary compression will reap many benefits, including reduced turnover and improved productivity. Apart from that, when employees perceive that there is some fairness in their salaries there will be improved employee-management relations as well as increased employee engagement trust and morale at the work place.

The essence of compression is a failure by organisations to make meaningful distinctions among employees and differentially recognise what people are due.
Consequently, salary compression can be a serious problem that eventually causes an organisation to lose some of its most talented employees. Salary compression is detrimental to both the employers and the employees hence it should be managed or avoided in organisations.

 Emmanuel Zvada is a human capital consultant and an international recruitment expert. He writes in his personal capacity.