Authors: Catherine Bernard Lapointe Guillaume Paradis
When it comes to compensation, as in many other fields, nothing works in silos. Many variables are interdependent and sometimes highly correlated. Job role determines salary, bonuses and certain benefits; market forces influence pay scales, and consequently have an impact on salary levels; inflation affects pay raises; full employment calls for new measures, and so on.
Such is the context surrounding salary compression, whereby a number of variables can put pressure on salaries and create imbalances, to the point of undermining equity. While the scenario isn't new, it's now being observed on a much wider scale, not only across business sectors, but also at all levels of hierarchy. It's also one that's starting to cause serious headaches for organizations. Let's take a look at why and how to remedy the situation.
What is salary compression?
Salary compression occurs when the pay difference between employees who occupy jobs at different levels within a single job category, or between employees at different levels of hierarchy, is perceived as insufficient and therefore inequitable. In the first instance, this situation can lead to loss of motivation; in the second, it can hamper career ambition.
Take the example of a supervisor who's offered a managerial position. If the difference in salary and benefits (paid overtime, bonuses, vacation, etc.) isn't perceived as being significant enough given the additional responsibilities and workload associated with the new role, then the situation is considered one of salary compression. Given this context, although some employees might still accept a promotion if they're strongly motivated by their professional development, more and more are opting for the status quo.
As already mentioned, salary compression isn't a new issue, given its history in unionized workplaces. However, according to our recent observations, it's now spreading to non-unionized sectors, particularly within the upper echelons of management.
Salary compression is consequently becoming an added challenge for organizations already struggling to fill key positions, and many are even considering reviewing their salary structure or workplace hierarchy.
What are the possible causes of salary compression?
Several factors can lead to salary compression, including:
Minimum wage increases. Salary gaps narrow whenever a minimum wage hike leads to an increase in the minimum rate of a given scale without a proportional increase of its maximum rate, sometimes creating an imbalance between the salaries of new hires and longer-serving employees.
Overlapping pay scales. When the overlap in pay scales is significant — often due to a large number of job grades— salary compression issues are likely to arise eventually.
"Selective" salary increases. Nowadays, with most organizations facing major attraction and retention challenges, many find themselves forced to grant salary increases on a selective basis, for various reasons, including:
- When an increase in the minimum wage leads to an increase in salaries for jobs already receiving higher than the minimum rate, which is referred to as emulation or "ripple" effectand can put pressure on pay scales
- When it's necessary to pay higher wages to less-experienced employees to compensate for a labour shortage affecting specific positions
- When higher pay raises are required for certain jobs in response to union demands
Whatever the cause, salary compression can have a detrimental effect on workplace culture and thus undermine an organization's continued success. On the one hand, some managers may feel short-changed when compared to subordinates earning a similar salary, which can result in a higher turnover rate. On the other hand, some employees may experience a loss of motivation or feel less inclined to pursue their career development within the organization — which in turn may cause them to fall short of their full potential and result in job vacancies for longer periods.
What measures can address salary compression?
Several solutions can help confront salary compression in the workplace:
- Ensure that employees potentially affected by salary compression rank appropriately within their salary range. Some organizations have very specific rules for setting new salary levels following a promotion, which creates a constraint that leads to compression. Salary ranges, on the other hand, can allow for a sufficient gap between two levels.
- Examine the current pay structure. Are pay scales wide enough? Do they overlap? Depending on the breadth of the scales, there should be a sufficient gap between each of the job levels within the pay scales.
- Reduce the number of job levels. Having fewer job levels, and therefore fewer echelons within the hierarchy, increases the gap between job levels. This solution sometimes entails redefining job roles.
- Review maximum pay scale rates. First, ensure that the maximum pay rate set for each pay scale is competitive in relation to the market. Then confirm that the organization not only has the ability, but also is willing, to pay an employee this rate.
- Reassess the overall compensation package. While salary income remains key in terms of compensation, today's employees are placing increasing emphasis on other components of the total compensation package, such as benefits, growth opportunities and overall work conditions. Consequently, managers and HR professionals are well advised to use and promote all available options at their fingertips to motivate high-potential employees to move up the corporate ladder.
Key takeaways
Salary compression is a phenomenon that used to affect a limited number of organizations, but now seems to be spreading to different types of organizations, in a variety of contexts, and at multiple levels of hierarchy.
This problem shouldn't be taken lightly, since it can cause frustration, loss of motivation and even employee turnover, as well as jeopardize internal recruitment efforts to fill key positions within the organization.
Several solutions can be considered to remedy the problem, the ultimate objective being to ensure that a pay difference is maintained that's perceived as fair given the level of responsibility and the workload.
Let's continue the discussion. To learn more about salary compression and identify solutions that best meet the needs of your organization, contact us.
