Salary Compression and an Ounce of Prevention

Salary compression happens.  In all economic cycles, it would seem.  So it's worth talking about in a tough economy as well as in good ones, particularly since the actions you take - or don't take - during tough times will often directly impact the level of salary compression problem that will hit you when the cycle begins to turn. 

The kind of compression issue that I see pop up most frequently is where there is an insufficient salary difference (i.e. compression) between newly hired, relatively "green" employees and their peers with more experience.  Compression has a range of potential causes, but probably the most classic scenario is when a tightening labor market "forces" employers to hire new talent in at salary levels near (or even above) the salaries of current experienced employees.

And yes, I understand that most organizations mean to "pay for performance", not seniority or tenure.  I get that, I promise you.  Not all salary compression is problematic, but a fair share of it is.  Especially when employees tell me 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" applied to salary compression, in my experience, is to make select "adjustments" as necessary to re-establish an appropriate sense of equity between the salaries of new and more experienced employees.  I think that this is a sound approach for the occasional compression problems that crop up in every organization.  But when salary compression becomes a more widespread systemic problem, it is time to take preventative measures.

In most of the cases that I've encountered, a widespread salary compression problem can be traced back to a salary structure and salary increase policy that are out of step with the market.  If your salary program is out of sync with the market, then chances are good that the salary levels of many of your employees are as well.  Reality hits when you have to go out and recruit new people to join the organization.

What's the problem, you ask?  As we encounter compression issues, can't we just continue to address them on an ad-hoc basis, making salary adjustments when and where we need to? 

Sure you can.  But I'd suggest that it isn't a good use of your available salary dollars, or good HR practice.  Reactive salary expenditures never get the same ROI - in terms of employees' hearts and minds - as proactive salary expenditures.  Proactive salary dollars, particularly when they are aligned with a strong and well-designed pay program, deliver the message that you value employees and are willing to reward them for their efforts and results.  Reactive dollars deliver the message that you are fixing a problem (a problem, by the way, that some employees will assume you knowingly allowed to happen). 

What do you want to do with your limited salary dollars?  Reward employees or fix problems?

I realize that many of us in HR are between a rock and a hard place these days, trying to keep salaries and salary programs intact.     But the tide will turn, the economy will eventually rebound and labor markets will tighten - some much more quickly than others - bringing a perfect storm of salary compression for organizations that have allowed their salary programs to languish.  My point is simply to do what you can to keep your programs market competitive, keeping particularly mindful of where you will be hiring and potentially facing a talent crunch.

Postcript: Jim Brennan of ERI calls our attention to a number of trends that may be converging to exacerbate compression problems, particularly at the low end of our salary structures - be sure and read his thoughts in the comment section of this post.

Image: Creative Commons Photo "The New Dollar Bill" by Simon Davison

 

Comments

[E James (Jim) Brennan]

Important issue at a critical time, with rough economic seas forseen and increase budgets at a new low. National and local political forces are combining right now to create even more pay compression in the immediate future, as a growing number of states adopt super-minwages above the required Federal rate and a new administration will throw a tidal wave of even higher Federal FLSA rates, union-friendly measures and more unionization in general. When wage compression from below ripples up in declining feathered waves, the reactive dollars spend to "keep employees whole" are frequently seen as purely COL-driven (which they truly are, in origin), disassociated from merit, and mere minimums management HAD to do after emps had been injured. All true assertions. But if bright minds acted pro-actively, spending the same amount beforehand, their spend is more likely to be appreciated rather than cynically begrudged. The accomodations to the required annual increases focused at the bottom of the pay structures have effectively eliminated the traditional middle management buffer zone at many employers, leaving only periodic job redesign, wholesale reclassifications and alternating pay grade structure configurations to mask the true problem. You can't win in the end, but you can minimize your losses rather than maximize them.

[Ann Bares]

Jim:

Great points all - a number of trends converging to create an enormous (and quickly closing) vise at the bottom end of our pay structures. Forewarned is forearmed - thanks!