Compensation is arguably the most important way organizations reward their team members for the work they do. Sure, mission-based work and verbal appreciation are nice too—but those don’t help much in the way of paying for one’s mortgage, rent, food, or hobbies. And, while compensation isn’t often cited as a reason people stay at an organization, it’s one of the most common reasons they leave. Don’t let salary compression be to blame.
Salary compression is when there’s little difference in pay between team members, despite differences in things like skills, experience, performance, seniority, or tenure.
It’s commonly seen when new employees are offered starting salaries similar to longstanding employees, or as team members’ salaries approach those of their managers. It’s also common in certain industries, like academia, where opportunities for advancement are more rare.
In some cases, salary inversion occurs, in which less experienced team members outearn their more experienced colleagues—or even their managers.
There are many things that can lead to salary compression, and understanding the cause is key to understanding how to approach solutions.
Keep an eye out for salary compression during your regular review cycles. You can spot it by looking for clusters in compa ratio distribution and salary distribution analyses.
Since compa ratios show you an employee’s salary relative to the midpoint of their position’s salary range, this is a great metric to normalize your data. Review your team’s compa ratio distribution overall, by tenure, and by job function, and look for any irregularities.
For example, do you have little variability in compa ratios? Do compa ratios skew low, or high? Do newer team members have higher compa ratios than your more tenured team members? Do any managers have unusually low compa distribution? These could all be signs of salary compression, and worthy of further investigation and action.
You might also review salary distribution by job level to see where salary compression may be occurring. Again, look for clusters and irregularities. Too many team members with similar salaries may require investigation and action.
Salary compression can affect team morale, engagement, and retention. Your team members want to be rewarded for their contributions, and they want to know they have the opportunity for future earning potential. Otherwise, they may look for another role, or—worse—begrudgingly stay.
Salary compression can also affect pay equity, and may cause legal trouble if it negatively affects compensation for those in protected groups.
If you see salary compression at your organization, here are some steps you may take to correct it:
Salary compression can lead to unfair compensation decisions that demotivate and disengage your team members. Keep an eye out for it, and take steps to address and prevent issues that could cost you employees.
Your team members are your competitive advantage. Treat them as such.