An example of pay compression will help highlight why it leads to so many problems within workforces. Employee A has been with the company for 10 years. When she started, she earned $15 an hour and got a standard benefits package that included two weeks of sick time and two weeks of personal time. Over the decade, she has received annual 4 percent raises. Today, she earns $21.34 per hour.
The problem is that Employee B started his job last year at $18.50. From HR’s perspective, this made a lot of sense because it’s very close to Employee A’s starting salary — after inflation. When Employee A learns that Employee B makes the wage it took her more than six years to reach, she feels unappreciated and unhappy. Now, she thinks she should leave to find a new job at a company that will pay her better.
Contact America’s Back Office to speak with an HR professional with experience fighting pay compression.
Common Sources of Pay Compression
Several factors can contribute to pay compression. Three common factors include:
- Overly Broad Pay Grades — Broad pay grades often mean that people stay within the same pay structure for longer than they should. They might get regular raises, but they don’t have opportunities to move into positions that pay higher salaries. This is what happened in the example above.
- Demand Exceeding Supply — When companies have a hard time attracting new employees, they must increase entry-level pay to fill positions. Existing employees, however, may not benefit from the higher entry-level pay since they already work for the company.
- Outdated Wage Data — If your organization doesn’t have access to the latest wage data, you might not know how to identify suitable payments for your employees. This situation becomes most problematic when the minimum wage increases but the increase only affects incoming employees.
Problems Caused by Pay Compression
Pay compression obviously causes problems. Otherwise, you wouldn’t need to think about it. Once you see the effects that it can have on your team, you will know why you need to take it seriously.
Higher Employee and Manager Churn Rate
A high turnover rate can cause all kinds of problems throughout your business. When employees leave because they don’t feel appreciated, you have to replace them. That means:
- Spending money recruiting and training new hires
- Enduring the learning curve as new hires adjust to new tools and expectations
- Disruptions in productivity
The amount of money that you spend — and lose — from a high churn rate depends on what jobs your employees have. Regardless, replacing experienced employees will always cut into your budget and productivity.
Low Morale (and Poor Productivity)
Is it better or worse for experienced employees with low morale to keep coming to work? It’s difficult to say. On the one hand, you don’t have to recruit and train as many new employees. Then again, low employee morale often manifests as:
- More frequent absenteeism
- Low quality of work
- Petty squabbles with colleagues and managers
- More customer complaints
These symptoms of low morale will make it increasingly harder for your teams to meet their quotas. Eventually, you may end up firing the employee because of poor performance. Then, you’re right back to the original problem of spending time and money on new hires.
Find innovative ways to make your workforce feel valued by talking to an HR professional at America’s Back Office.
How You Can Fight Pay Compression
You don’t want to lose your best, most experienced employees. You also don’t want them to feel demoralized and unwilling to find joy in their work. Luckily, you can fight pay compression.
Base Raises on Performance
Some companies automatically give raises each year to keep up with inflation and increase pay to their long-term employees. You’ve already seen the problem that can cause: new employees often enter their jobs making slightly less than team members with a decade of experience.
Basing raises on performance gives managers more opportunities to show employees how much they’re appreciated. Even if you continue using annual raises, let managers choose from a range so they can reward top performers. For instance, managers might give low-performing employees 2 percent raises while high-performers get 6 percent increases.
Increase Benefits as Well as Pay
An excellent benefits package can make it nearly impossible for an employee to leave your organization. Award your best employees with additional benefits that will keep them productive and happy.
Some of the best employee benefits include:
- Flexible working arrangements
- Seminars and workshops that help employees build skills
- Formal mentorships
- Paid time off for volunteering
- Health coverage
Depending on your business’s flexibility, you might offer your top employees opportunities to attend workshops, access extra paid vacation days, or introduce them to mentors who can guide their careers.
Review the Latest Bureau of Labor Statistics Data
Keep up with the latest Bureau of Labor Statistics data to make sure you’re giving your employees compensation that matches the rest of your industry.
Outsource Payroll Decisions to Third-Party Professionals
Outsource your payroll, salary, and benefits decisions to third-party professionals who can make data-based choices that lead to increased satisfaction among your workforce.
How America’s Back Office Can Help
The idea of adjusting how your business compensates employees might make you feel anxious. It’s not the type of project most people want to tackle. Still, it’s necessary to fight pay compression and keep your company on a path to success.
Schedule a discussion with the professionals at America’s Back Office so you can learn more about outsourcing your HR decisions. You might find that you save money while getting better results.
