What Is Salary Compression?

What is salary compression?

Salary compression reflects the impact of wages or salary for entry-level, or low-skilled workers, and high-skilled workers trending toward each other.

Salary compression, also referred to as pay compression or wage compression, can occur as some employees have been in their positions for a long period of time and their wage have not kept page with the market, while newer employees being hired into the company are paid at market wage, resulting in salaries becoming compressed.

The problem with salary compression

The primary problem with salary compression is that it leads to pay inequities which may cause employee turnover—or even EEOC complaints.

Causes of salary compression

There are a couple of reasons that companies may experience pay compression. For instance, demand for certain types of positions may be greater than the availability of people with the required skills, causing companies to pay more for this talent without adjusting the rates of others within the organization.

Salary compression can also occur in situations where companies raise their minimum wage rates. SHRM has cautioned organizations to be aware of this potential as they respond to state and federal minimum wage mandates.

Pay compression may also be the result of outdated compensation structures that are no longer in alignment with prevailing market rates—existing employees’ wages don’t increase quickly enough to keep pace with increases in the market.

Having pay grades that are too broad may also lead to salary compression, if for instance you have various levels of a certain position—e.g., administrative aides—but they are all within the same pay grade.

How to handle salary compression

The best way to stay on top of the potential for salary compression to occur is to continually monitor internal and external pay to ensure that pay is in alignment with the market. In addition, as shifts occur—e.g., if your minimum wages increase—make sure that all internal pay scales are adjusted accordingly.

Finally, maintaining a market-based approach to pay which has become common over the years (as opposed to pay based on seniority) can help ensure that salary compression is kept to a minimum.