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Pay compression 1


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Pay compression 1

  1. 1. 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 come 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 employees. 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 prevent recurrence
  2. 2. •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.