Pay compression is when salary differentials become insignificant to be equitable, leading to complaints from employees. Pay compression is a situation where there are insignificant or no salary differences for individuals in the same grade. It is also present when there are no significant differences in salaries for individuals in an adjacent higher grade and those below that grade. Sometimes pay compression is present when subordinates earn more than their boss. Whenever pay compression is present, there is discontent around pay equity. It may lead to staff turnover, especially in critical, high-value roles. When pay compression exists, it shows that the leaders in an organisation have ignored performance, tenure, skill and experience when allocating salaries.
The critical question to ask is why we end up with pay compression. Pay compression is a symptom of poor management of the pay structure primarily out of ignorance of pay structure principles.
Once an organisation does not follow pay structure principles when adjusting salaries for people at various levels, it leads to pay compression. This is often when managers arbitrarily adjust salaries for individuals regardless of grade. When leaders in an organisation decide to give across-the-board pay increases, it can lead to pay compression. Sometimes unionised staff get higher increases than managers leading to them earning more than their managers. This is the worst form of pay compression. In some instances, the managers are mocked by their subordinates for earning less than them. How will your managers be able to confidently lead their subordinates if the subordinates earn more than them?
Pay compression can be experienced when new employees earn more than their more experienced colleagues in the same grade. This happens when new employees bargain for higher salaries above what current employees are earning.
The core principles of a pay structure are that each grade will have a minimum, midpoint and maximum salary. There will be a salary difference between adjacent grades, referred to as progression. The standard rule is that new and less experienced employees are paid close to the pay grade minimum.
Competent and consistent performers are paid around the midpoint of the grade. Only exceptional rare talent will be paid close to the grade maximum. When these principles are ignored, it leads to pay compression.
When an organisation experiences pay compression, you often find so many requests for people to be upgraded. The reason is that people know that in such situations, the only way to get a salary adjustment significantly higher than that of your subordinate or those less experienced than you is to request for regrading of the role. The other consequence of pay compression is that the organisation will be overwhelmed by job regrading requests and end up doing a wholesale grading exercise costing the organisation huge sums of money.
New employees tend to come with more bargaining power than current employees. When there is demand for certain skills in the market, the organisation may increase salaries for new hires compared to those already earned by current employees. This will lead to a situation where new employees earn more than current employees without a credible reason besides that the new employee had more bargaining power.
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The most significant consequence of pay compression is low employee morale. It is likely to lead to higher turnover, especially among those with high-value and in-demand skills. In cases where managers earn less than their subordinates, you may find a high turnover of managers. One of the most significant consequences, often ignored, is that when there is pay compression, subordinates, would agitate to form a worker's committee. Such a move will complicate the management of industrial relations with the whole company. So how do you address pay compression or ensure your organisation does not experience pay compression? First, you must have a pay structure supported by a clear policy and procedure. You spell out how salary decisions are made and implemented in such a policy. One such key decision is that all new employees will start at a salary grade minimum unless there is a justifiable and verifiable reason why they should earn a salary close to the midpoint of the grade. Such incidents happen especially when highly competent employees with in-demand skills join your organisation.
The other solution is that no employee should be paid outside their grade salary range for whatever reason. As you know, each grade will have a salary range in a pay structure. This salary range can be from as low as 15% to as high as 100%. The salary range is much lower in the public sector than in the private sector. Low salary range and progression can lead to paying compression.
Another way to deal with salary compression is to ensure that you factor in a merit component in all salary adjustments. That will bring salary differentials for people in the same grade based on performance.
One of the ways to deal with the effects of pay compression on your staff is to implement a separate performance-based pay system (based on once-off payments) to supplement the basic pay structure. Such a move will lessen the burden on those employees who feel they are unfairly treated on the basic salary. The last piece of advice I will give you on this is to capacitate your HR team to detect pay
Nguwi is an occupational psychologist, data scientist, speaker and managing consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and HR consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 24 248 1 946-48/ 2290 0276, cell number +263 772 356 361 or e-mail: [email protected] or visit ipcconsultants.com.