The Devastating Effects of Salary Compression on Employee Engagement (Part 3)
By James T. Stodd, SPHR, SHRM-SCP
October 26, 2015
This post follows a fictional account called “Marissa’s Story”, which was used in Parts 1 & 2 of this series to explain salary compression and its impact upon employee engagement and retention.
Through use of a fictitious story, Parts 1 & 2 of this series illustrated what “salary compression” is about, the perceived inequity that frequently results in the minds of very talented, capable and otherwise fully engaged employees, and some of the behaviors those individuals may adopt to restore a sense of equity, even if it means taking another job. While Marissa’s Story is a fictional account, it does illustrate real life circumstances and scenarios that are played out hundreds of times each day. Salary compression generally occurs when salary increases for existing staff do not keep pace with market realities for attracting new talent, or what employers believe to be the market realities. This Part 3 of the series addresses what employers can do to “prevent” or “fix” salary compression in their work environments.
Before doing so, however, let me quickly address a comment I made following the first chapter of Marissa’s Story. What I said was that both Marissa and her fictional employer (Weyman Surgical Center) were victims of “salary compression.” How is it that an employer can also be a “victim?”
Well, we need to understand that most employers find it necessary to maintain a competitive position with both the starting rates they offer to new hires, as well as the pay increases they grant to existing staff. Unfortunately, the two don’t necessarily coincide. And, while an employer may want to make sure that pay rates for existing staff always go up as rapidly as those for new hires, competitive pressures, mixed with concerns over compounding fixed costs, simply may put limits on what an employer feels they reasonably can do. This is why many experts believe that the typical pay increase granted to existing employees, regardless of industry, profession, region or level, has and will continue to hover around 3{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7}.(1) At the same time, employers need to do what’s necessary to attract new talent, which often puts them into somewhat of a quandary. The question is how to best deal with that quandary. Here are some suggestions:
1. Benchmarking: Benchmark your pay practices frequently and regularly using market appropriate data, then make data-driven decisions based upon empirical information, not your gut, hearsay, or what the most recent candidate requested. This will help make sure your salary decisions for new hires and promotions are in touch with market realities. If you need help with the latter, please refer to my previous posts on Market Leadership and Pay, Parts 1(2) and 2.(3)
2. Structure Adjustments: A lot of times hiring managers want to hire people well into the salary range because they believe the salary range is antiquated. Therefore, in addition to the benchmarking noted above, it’s important to adjust your salary structures and ranges ANNUALLY based upon prevailing practices. Then make sure pay increases for existing staff (regardless of form) keep up with the structure adjustments.
3. Structured Approach: Establish a structured approach for managing new hire salaries (and promotional pay increases) based upon experience, competencies, credentials, performance and tenure. That can be a formal step-system to manage advancement through the salary range, or a less rigid approach. But it needs to be well thought-out, structured, and implemented consistently.
4. Advancement Categories: Consider establishing “job-tiers” or “progression ladders” for certain occupations in order to add additional categories, and higher rates of pay, based upon experience, competency (or credentials), knowledge, or performance. These approaches work effectively with professional and technical occupations (like nurses, accountants, engineers, professors, electricians, draftsmen, etc.) where opportunities to advance within the organization (based upon responsibility and level) can be constricted.
5. Equity Adjustments: Include “equity adjustments” among your repertoire of salary management tools (along with merit, general, COLA, etc.), and use them when necessary to restore internal equity.
6. Coordination: Whether it be the CEO or the HR Manager, make sure someone is capably monitoring and coordinating all pay decisions with a mind on “internal equity,” and ensure that person is empowered to make decisions (including saying “NO”). We all want to be able to attract and hire the very best talent. However, unless your organization can afford to be a market leader across-the-board, there will likely be a “franchise player” or two on whom you’ll have to “pass” for the benefit of the team.
7. Performance Management Matrix: Implement a performance management matrix to better ensure pay increases make sense (in absolute dollars) when considering both performance and the employee’s current pay. This will help ensure top performers are appropriately advancing through the salary range and less subject to salary compression.
8. Variable Pay: Consider using “variable pay” programs (bonuses and incentives) to extend rewards to significant contributors and top performers without adding to the “fixed cost” burden. And, there is nothing wrong with establishing a service requirement for participation. After all, we already do that with retirement plans and other benefit programs.
9. Education: Salary compression and pay inequity are not new challenges; in fact they date back to biblical times. And, no matter how many measures you implement, it’s unlikely you will administer pay perfectly in everybody’s mind. Therefore, it’s important to educate your managers and staff about the pragmatics and challenges of competitive and equitable pay administration. That education should openly discuss your compensation philosophy and systems with your staff. With education, many will be much more open and understanding of the challenges, not take decisions quite as personally, and know how to react when things don’t always go the way they would have them go.
1 Craver, Jack, Companies Putting Money Into Bonuses Over Salaries, BenefitsPro; August 27,2015 (http://www.benefitspro.com/2015/08/27/companies-putting-money-into-bonuses-over-salaries)
2 Stodd, James T., Market Leadership & Pay (Part 1), LinkedIn: August 12, 2015
3 Stodd, James T., Market Leadership & Pay (Part 2), LinkedIn: August 18, 2015