How Pay Compression Can Kill Employee Engagement and WHY it Matters

As much as we’d like to think our best employees are working in La La Land, loving the job for the job, we need to return to earth and address some basics. Salary matters. What employees get paid matters. And when employees perceive their pay to be unfair – whether it is or isn’t – engagement will tank.

The sense of unfairness often happens when organizations find themselves in a place where they’re dealing with salary compression. Salary compression happens when there is little difference in wages regardless of experience on the job or level of education. It also happens when the market rate for certain kinds of workers has outpaced the pay increases an organization has typically given to its tenure employees.

Sometimes organizations can really find themselves in a tight spot – balancing keeping their experienced employees and capturing the attention of new talent, all without going broke. And, make no mistake, there are no secrets. Everybody knows what everybody makes, and keeping a lid on things will inevitably have the whole thing blow.

Here are 7 tips to avoid and/or deal with pay compression:

1. Communicate: Perception is reality. Your compensation may be fair, more than fair. But if employees don’t see it that way, engagement will suffer. Many employees don’t understand what they make. Explain full benefits, partial benefits, and what that means in dollar costs to an organization and how much out-of-pocket the employee is saving. Also, if, after analyses, you’re going to do a massive restructure of salaries, then you’ll need to communicate this with the entire team as well.

2. Be transparent: Don’t try to hide what employees make. This will create an environment of mistrust. Make the compensation structure transparent across departments and the entire organization.

3. Make a compa-ratio within each salary grade by the employee’s tenure in the position. This helps to analyze disparities (new employees making the same or more than experienced) as well as determine if experience is a critical piece of that position’s salary.

4. Compare supervisors’ salaries to their direct reports’ salaries. When salaries of the direct reports are 80% or higher of a supervisor’s salary, you will need to watch closely if that gap closes even more. Adjustments will have to be made.

5. Finance and HR must work together: Salary has to be determined by both, and restraints must be clear.

Organizations should examine salary structure every 3 to 5 years (maximum), though some HR recommend every 18 months to catch problems early in the game. Align salary structure with the organization’s needs and labor market. Also, update job descriptions. The workplace has changed with technology, and some older positions might be taking on a lot more work.

6. Get uncomfortable: Discussing compensation isn’t easy, and it’s important to recognize that. So, as a manager or senior leader, practice your talking points. Prepare for discomfort. And make salary discussions part of the workplace. As soon as it’s taken off the taboo list, conversations and communication regarding compensation get easier.

7. Put a cap on it: Have HR and finance work together to establish a pay range for new hires. This can keep HR or managers from hiring a “rising star” for a lot of money and, in the meantime, demoralize the team.

Salary matters. Having a transparent salary structure, strategic communication plan, and salaries that align with the company mission and vision as well as market values, are critical steps to keeping employees informed and satisfied.

The bare bones of compression is when an organization doesn’t make significant distinctions among employees and fails to compensate fairly accordingly. Compression is almost inevitable. But with these 7 tips, organizations can tackle and/or prevent it from blowing out of control.