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Salary Compression
Salary compression is a particularly challenging problem in any orgaization.
Salary compression occurs when the differential between the salaries of two employees is not sufficient to be fair and equitable given the circumstances of their employment.
Here's an example of salary compression:
BIG Company, Inc. recently hired Abigail. Her starting salary is $40,000. Jeff and Margo are also BIG Company employees, are good performers, and have been in their jobs for 2 and 3 years, respectively. Jeff makes $38,500, and Margo makes $39,800. Neither of them thinks Abigail's starting salary is fair or equitable as compared to their own pay. Even if the employees were unaware of the issue, the manager should bring it to Human Resources to resolve.
Salary criterion for hiring is primarily determined by the external labor market and an organization's ability to pay. In order to hire a qualified new employee, an organization must pay a competitive rate.
The salary of the current employee is determined by a combination of internal factors, including the:
- employee's current pay
- AND
- the company's salary increase budgets
When labor markets are tight, salary rates needed to hire new employees rise rapidly; far more rapidly than the internal salary system can respond to. This can cause salary compression.
Compression is also likely to occur with:
- exempt first-line supervisors and their nonexempt employees who are paid overtime
- direct sales staff making more than their manager through variable pay
- existing employees as compared to new hires performing the same job with similar experience
- middle management, who may be squeezed between top management and their senior individual contributors
All four examples involve a hierarchy where the perception of unfairness is related to an inadequate distance between organizational levels.
The solution
Solutions to compression depend on the compression type and how serious the problem appears to management.
Here are some possible solutions…
- Ignore it. This is possible if people are moving up the career ladder rapidly and the problem is mostly one of timing.
- Adjust the internal structure to align with the external realities. This is an expensive alternative, but it may be necessary if the organization is experiencing high turnover and employee discontent.
- Maintain a policy statement. The most likely solution is a policy statement that a particular amount (for example, 15%) be maintained between employees and their supervisors. Rather than change the salary range for the supervisory jobs, however, organizations often pay this differential as a bonus based upon the compensation of the subordinates.
Memory Jogger
Which of the following is not a possible solution to compression issues?