Pay Compression Law & Legal Definition
•Pay compression is the situation that occurs when there is only a small difference in pay between
employees regardless of their skills or experience. It is also referred to as salary compression. Pay
compression is the result of the market-rate for a given job outpacing the increases historically
given by the organization to high tenure employees. Therefore, newcomers can only be recruited by
offering them as much or more than senior professionals.
•Pay compression is a very real issue with many of you (and my
clients) today, compounded by our early economic recovery. Pay
compression, simply, occurs when introductory hiring salaries
close to or match incumbent salaries.
•If prevention isn't successful, and a pay
compression situation exists, then an employer should take the
following 3 steps:
1.Accurately assess the situation. Determine the specific
positions that seem to have experienced the compression.
Was the compression created by under-paying current
employees, overpaying new hires, or did the market truly
move significantly enough to cause the compression? Then,
evaluate your compensation mix. Are you relying too much
on base compensation? Compression is much more common
in companies with little variable or incentive pay -- as a
percentage of total compensation -- in the compensation
mix. Finally, reconsider skill requirements. Do you really
need a multi-skilled, home run-hitting renaissance man (or woman)? If
not, make sure you are comparing apples to apples when you compare
new hires to existing employees.
2. Address the compression head-on. Explain the issue to current and new
employees, detailing plans to correct the compression. These plans can
include: Re-accomplishing market analyses and making related range
adjustments; revising specific compensation plans to provide for more
emphasis on variable pay, allowing acceptable differentiation between
performers; and potentially some one-time leveling payments to affected
3. Change your process. Something wasn't working that allowed or caused
the compression. Perhaps there was insufficient attention to market
changes within existing compensation schemes (dated data), over-reliance
on competitor-hiring, or simply lack of necessary focus on current hiring
practices, allowing hiring managers to use money as the most significant
hiring motivation. Something is off-balance, and must be corrected to
•Pay compression happens when someone is hired for a job and they don't move forward
very fast in pay. Most of the peers in the department gravitate to about the same pay
range relatively quickly. Meanwhile, the market is moving up and down. When someone
new is hired, to be competitive the company may need to bring the new person in at a
rate that may be higher than what most of the current staff is currently making. Most
companies will not adjust the whole department to make it more market-adjusted.
Therefore it becomes necessary to leave the job just to get a satisfactory pay increase.
And since many employers want pay history (and some check that info) it may not be
possible to leave and get anything other than a lateral move.