How does pay compression occur within an organization?

It can occur when organizations raise starting salaries to stay competitive but don’t adjust compensation for existing staff. It can also show up when promoted employees out-earn their peers in similar roles. Pay compression also occurs when hourly workers earn more than their supervisors due to overtime pay. Limited budgets and skipped compensation reviews can also contribute to pay compression.

What is the impact of pay compression on employees?

Pay compression can impact how employees perceive fairness in compensation. When compensation gaps narrow, experienced employees may notice fewer pay differences compared to newer hires. Addressing this proactively can help maintain engagement and support retention.

How can employers address pay compression issues?

Businesses can start with a thorough compensation review. They can conduct salary benchmarking against industry and location standards and make adjustments. When raises aren’t possible, they can offer merit-based increases and incentive-based rewards. Examples of this include employee stock options or bonuses for high performers. These help employers adapt compensation and drive productivity; they can also reduce turnover.