When an employee thinks about whether their compensation seems fair, they typically make two comparisons, comparing their compensation to:
- The external market
- Their peers they work with (internal market)
While human resource professionals and managers typically are very in tune with what the external market pays, there may be less focus on internal comparisons, or internal equity.
There are two primary concerns with internal equity: pay equity (differences in pay based on a protected class rather than skill, performance or experience) and salary compression. We’re tackling salary compression in this edition and will address pay equity in our March HR Scoop.
Salary Compression
Salary compression occurs when there is little to no difference in pay between employees regardless of their skills, performance, or experience.
It often happens when new hires are brought into the organization with salaries close to or exceeding those of existing employees. Salary compression can also occur between a supervisor and their team members.
3 Steps to Resolve Salary Compression Issues
- The first step in resolving salary compression issues is to identify where it is occurring. This analysis of base and total compensation requires an understanding of the organizational structure, job responsibilities and relative levels of employee performance.
- The second step is to allocate compensation dollars to address the salary compression. If significant compression exists, it may take two or more years to fully address the issue.
If all compression can’t be addressed in one budget cycle, prioritize salary adjustments based on the level of risk to the organization. These risks may include:
- Experiencing unwanted turnover
- Potential legal action - if inequities more negatively impact women, minorities or any other protected class
- Reputational risk - when the community becomes aware of unfair compensation practices – impacting your ability to attract new employees and maintain a positive image in the community
- The third and final step, is to understand how the instances of salary compression occurred and modify hiring, promotion and salary adjustment processes to reduce the likelihood of future compression.
This will likely require changes to management and/or HR processes including how compensation decisions are made for new hires, promotions and annual salary increases.
Regularly Review Salary Compression
While understanding how the salary compression occurred and modifying processes will reduce the likelihood of future issues, it is a best practice to assess your organization for salary compression on a regular basis.
How often the analysis needs to occur will depend upon:
- The size of your organization
- Volume of hiring new employees
- Structure and process of annual salary increase allocations
- How much internal movement of employees occurs
Contact Us
If you would like assistance identifying and addressing salary compression within your organization, contact Beth Ostrem or Amy Ryan for more information.