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Pay Compression

Pay Compression can be defined as narrow pay differentials that create pay inequities between supervisors and subordinates or between experienced employees and newly hired employees in the same job.  Although there are many factors that contribute to pay compression, the overriding factor is poor administration.  Attention must be given by the HR professionals to on-going administration of all pay changes including hiring rates, promotional increases, merit increases, and increases resulting from minimum wage or market changes.

Proper equity analysis must be performed for possible changes to improve pay equity.  Not doing so can result in internal inequities that can range from individual to systemic issues leading to employee dissatisfaction.  Pay compression can cause employee morale issues and effect employee perceptions regarding “fair pay”.  This can lead to retention issues and even negatively impact productivity.  In addition, pay compression can even lead to legal issues if, for example, a protected class is at the wrong end of a pay compression issue. The minimal savings to an employer by not doing equity increases can lead to substantial costs in the future.

One example of pay compression is when merit increases fail to keep pace with the market changes leading to excessive turnover.  Employers in these situations often find themselves faced with having to hire new employees at rates at or above current employees.  An experienced compensation professional can review and access not only the resulting inequities and recommended increases, but also provide a comprehensive assessment of the pay structure, pay policies, and of course, any pay administration shortcomings, and recommend changes that will help avoid serious pay compression issues in the future.

One possible solution to pay compression is to introduce a merit increase matrix that clearly links merit increase percent with job performance.   A merit increase matrix may also delineate for each position a range in combination with job performance.  As you can see by the below example, the merit increase received depends both upon the employee’s performance rating and their current salary’s position in the salary range. There are four levels of performance and three levels of salary range based on longevity or experience. This method provides a systematic approach to awarding your higher performers and moving their pay at a pace that may keep more in line with the market, as well as ensuring equitable and fair pay in you organization.

Merit Increase Matrix Example

Salary Range – 1st Tercile Salary Range – 2nd Tercile Salary Range – 3rd Tercile
Performance Outstanding

6-8%

5-7%

3-5%

Performance Above Average

4-6%

3-5%

2-4%

Performance Average

2-4%

1-3%

0-2%

Needs Improvement

0-2%

0-2%

0-2%

 

To maintain internal equity and avoid pay compression, it is important to stay current with the market by consulting with professionals.  At WageWatch, our professionals can provide your business with compensation surveys and salary reports to help you establish a budget for your merit pay program, including bonuses and incentives. Our innovative company is a leader in the collection of data for surveys and salary reports, which allows us to provide services to a wide range of industries in both the private and public sector. To learn more about our compensation surveys, salary reports and other services, please call 480-237-6130 or contact us online.

This entry was posted on Wednesday, February 20th, 2013 at 5:49 PM and is filed under Benefits & Compensation. You can follow any responses to this entry through the RSS 2.0 feed. Comments are currently closed, but you can trackback from your own site.