Inflation Threat Raises Possibility Of Corporate Pay Compression

As often happens, some new employees are hired into an organization at a higher salary than longer-term employees in the same department.

At the same time, other open positions are often filled at salaries higher than that received by the previous incumbent.  Should the trend continue over time, for either or both of these situations, organizations are then faced with what is called pay compression.

Pay compression occurs when less experienced people earn as much as or more than longer-term employees due to rising starting salaries.  It also can surface when staff members earn overtime and makes as much as or more than their exempt supervisor. In both cases, employee morale suffers.

A side consequence of this trend is that long-time, often high loyalty employees begin to feel unwanted and/or discriminated against.

Higher Inflation Threat

With the threat of increased inflation hanging over the economy, long-term wage stability is threatened in coming months. HR managers need to guard against unchecked and unnoticed pay compression. In year-end predictions for 2006, many experts cited this problem as one that will need to be addressed in coming months.
According to many experts, wage compression often threatens those employees who tend to be the most productive, motivated staff.  Therefore, maintaining a proportional, rational salary scheme is important for morale and legal reasons.

In some cases, competing wage pressures from area employers force companies to pay for new hires at a scale higher than long-term employees were receiving.

At The Citadel in South Carolina, a pay compression situation resulted in charges of discrimination that required considerable effort on the part of school administrators to defuse.

Mostly black employees in the grounds department of The Citadel charged the military college in August 2003 of not paying them fairly, according to Patricia McArver, the school’s vice president for communications, in SHRM magazine.

Raising Staff Concerns

When the college faced competitive wage pressure from plants around the Charleston, SC campus, the offering letters for HVAC specialists for the heating and air-conditioning (HVAC) department were increased.  However, this department was part of the same physical plant division as the grounds department. The upshot was that those new hires were suddenly making more than some more experienced employees who had worked in the college’s physical plant for 10 or 20 years, and were mostly black.

Upon investigation, as reported in HRHM magazine, after reviewing physical plant employees’ salaries, tenure, and annual performance reviews and ratings over the previous five years, the College found that the pay disparity was not racial discrimination, but pay compression.

That’s often how it goes with pay compression. Employers are usually unaware that pay compression exists until problems surface. Still, there are steps employers can take to recognize whether pay compression exists and to avoid the negative side effects it creates in the workplace.

Recognizing Compression

Experts say pay compression exists in many companies, even with the most careful supervision by HR departments.  Competitive pressures lead companies to make decisions about new personnel or promoting others that can lead to pay compression.

The problem cuts across workplaces and employment levels—from government institutions, to low-wage service jobs, to manufacturing facilities to higher-demand positions like marketers, experts say. Another consequence is often a male-female wage disparity.

A symptom of such a situation is often high employee turnover and low worker morale.  The situation also makes companies more susceptible to unionization efforts.

This problem can be particularly acute in growing companies with highly touted, valued, talented individuals working to build a new enterprise.

Jeswald Salacuse writes about managing such a group in his new book, “Leading Leaders: How to Manage Smart, Talented, Rich and Powerful People.”  While putting together and managing such a team requires finesse, firmness and leadership, such an amalgamation of talent often leads to pay compression at senior and lower levels.

Salacuse argues that while salary and bonuses are motivators for these individuals, they also tend to build teams that often require higher salaries than other employees.  The result is an organization with a skewed workforce salary structure that will eventually lead to morale problems.

Long-Term Solutions

As reported in SHRM magazine, Elwood Dietz, consulting manager with Corporate Compensation Partners in Sewickley, PA, recommends that employers use the entire salary range when making compensation decisions, and place those with the greatest experience and skills at the higher end of the range.

Employees also should be compensated for their performance, with rewards and other incentives, Dietz is reported to have recommended.  He also suggested using employee development programs to help workers enhance their opportunity for future promotions and the salary raises that come with them. Cost savings for employers result “by allowing internal investments to continue to grow.”

Experts also agree that companies should be proactive and not reactive to perceived pay compression issues.

Said one expert, “when the problems become so entrenched that significant action is required, that program should be well thought out, comprehensive and above all communicated to the staff in a positive manner.”

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