Salary Compression: Causes, Warning Signs and Fixes

Salary compression is one of the first problems a pay review turns up. It builds up quietly, and usually shows only when someone compares payslips.

What it is

Salary compression is when pay differences shrink more than experience, performance or job level justify. Two shapes are common:

• New vs. experienced: a recent hire earns close to, or more than, a colleague who has been in the role for years.
• Manager vs. team: a supervisor earns only slightly more than the people they manage.

When the shrinking goes as far as the less experienced or more junior person earning more, it is often called salary inversion.

Common causes

• Entry pay moves with the market, existing pay does not. To hire, you pay the current rate. The people already there got last year’s rate plus a small raise.
• Raises that trail hiring rates. An equal percentage raise keeps everyone’s relative position, so whenever starting pay rises faster than the raise budget, the newest hires close the gap on everyone else.
• No range by grade. Without a ceiling and floor, offers follow negotiation instead of job level.
• Promotions without a real pay move. The title changes and the pay barely moves.

Warning signs

• New hires in the same role are paid close to or above long-serving staff.
• Supervisors earn only slightly more than their teams.
• Promoted people feel their pay did not follow their new role.
• Fairness questions reach HR more often.

How to fix it

1. Make it visible. Plot current pay against grade or job level. Look at the spread within each grade and the gaps between grades.
2. Set ranges. A minimum, midpoint and maximum per grade give offers and raises a frame you can check. See what a salary structure is.
3. Correct in stages. Fix the largest gaps first and, if the budget requires it, finish over more than one cycle.
4. Explain it. Each adjustment should come with a reason a manager can repeat.
5. Prevent the repeat. Review ranges against the market on a schedule, and track positions with a measure like compa-ratio.

A note on budgets

Fixing compression costs money. Compare it with the cost of the alternative: unfair pay that leads to the departures of experienced people. That comparison is yours to make with your own numbers; this article does not offer a universal figure.

If you want a clear picture of where compression sits in your company, Pay Compass shows pay against range by grade, and our salary structure service builds the ranges. A first conversation is free.