Determining appropriate salary for your employees continues to be one of the most challenging aspects of compensation – a field already characterized by numerous complexities – especially during times of perpetual 3 percent increase budgets. But one of the most common challenges is salary compression, or when new hires or newly promoted employees are paid at levels similar to or higher than what your current employees in the same role make. Needless to say, this can be perceived as unfair by those experienced workers who see new hires – often recent college grads – or newly promoted employees taking home a bigger paycheck.
Why would this happen? After all, shouldn’t your experienced colleagues be making more than someone new to the company? As with everything surrounding compensation, the answer is not so simple. In order to attract the best and brightest talent to your organization, you need to understand where the market is and what current pay levels are for the positions you seek to fill. If you can’t offer what others in your industry do, then you will simply lose the best candidates to the competition. So, as businesses face pressure to bring in top talent from leading colleges, it is common for starting salaries of new hires to rise, even if the needle doesn’t move for those already in house.
Understanding this reality of business, and being able to explain it to employees, is key to creating a fair, defensible and merit-based strategy to allocate compensation budgets. Basically, it all comes down to performance. Let’s say the market rate for engineers right out of college is $63,000 per year. But you may have an individual who started at $60,000, which was the going rate for their position at their time of hire. If that person is performing at or above level, then they should receive an increase to put them above what their new colleagues are making.
At the other end, if an experienced employee is underperforming, then they will be making less than a new hire. To avoid resentment in these situations, managers should have meaningful conversations with the individual to let them know what they can do to increase their performance level and acquire new skills, which will help them earn a higher salary.
Still, salary compression doesn’t just happen within a department, it can be perceived across the board if one department receives a higher raise than another. The reality is that not all departments and job families bring the same value to the organization. Certain roles will be in higher demand, meaning you’ll have to raise the starting salary for some positions faster than others in order to attract the best talent. For instance, the standard salary for finance jobs might increase by 1.5 percent per year, but for engineering it could be 4.5 percent. However, giving everyone the same 3 percent raise will result in underpaying those in business-critical roles while overpaying those in less essential positions – meaning your compensation budget isn’t allocated optimally.
Salary compression continues to be a challenging issue for employers, but having the knowledge and insight to explain the reasoning behind salary decisions is necessary to ensure everyone receives their fair share. By understanding the market and movement of your jobs, recognizing that all job families aren’t created equal, and being open and transparent about performance, you can invest in your people more wisely. At the same time, you can ensure employees understand why they receive their level of compensation – and what they can do to increase it.