Addressing Wage Compression to Attract and Retain Talent
Pay transparency continues to be a focal point this year. With?10 states ?having implemented salary range requirements for job listings, it’s paramount that employers manage pay policies and practices that promote fair pay in the workplace.?
As organizations incorporate these pay transparency policies, however, they must be mindful of?wage compression .?
Wage compression, also known as pay compression and salary compression, is a?pay equity ?issue that essentially overlooks important factors for paying employees differently, including tenure, experience, skills, performance, and education. It often occurs when new hires and tenured employees performing similar job duties receive close to, or exactly the same, compensation.
Wage compression is usually unintentional, and it can happen for a number of reasons. For example, in an effort to attract top talent during an increasingly competitive labor market, recruiters and hiring professionals may raise starting salaries. In doing so, it may create an instance of wage compression for current staff.?
Instances of pay compression can also happen during the event of an organizational merger or acquisition. Two separate organizations likely possess different pay policies, and when they combine, it’s possible for wage compression to surface.?
Wage compression is on the rise
Despite employers’ best intentions to promote pay equity, and transparent pay policies, wage compression is unfortunately on the rise. In fact, 56% of organizations reported experiencing wage compression in the last 12 months, according to a?survey ?conducted by talent solutions firm, Robert Half.??
Obviously, wage compression poses a serious risk for organizations looking to retain and attract talent during the tightest labor market in decades. Failing to address it can result in recruiting challenges and potential turnover.?
Moreover, wage compression can result in significant workforce challenges. Employees that become aware of unfair compensation practices within their organization experience a multitude of negative feelings, including a drop in morale, comradery, and self-worth.?
To add to the severity of the situation, when wage compression issues go unchecked for long enough, they can result in legal action. Oftentimes, employees that become aware of pay inequity may attribute it to factors such as gender or race/ethnicity – and those types of claims can create serious reputational damages for a company, in addition to significant punitive and monetary damages.
Fortunately, wage compression can be solved. Organizations aware of the issue have a multitude of resources for addressing it. According to the?report by Robert Half , 62% of organizations are increasing salaries for tenured staff to close wage gaps. This is but one way to help curb instances of wage compression.?
Below we dive into specifics on how your organization can correct as well as prevent future situations of wage compression.
Step 1: Review your compensation policy
Organizations eager to achieve pay equity need to have a great foundation, and that starts with a comprehensive compensation policy.
Review your policy to ensure you have clear salary ranges for departments and job roles. These ranges need to include salary caps – or ceilings that salaries cannot exceed. As recruiters seek out new talent, the salary caps will ensure that new hires are not brought in at a rate that would create?pay disparities ?or instances of wage compression for current employees.
As you ensure equitable salary ranges across your workforce, give special attention to the midpoint for each department and its job functions. To calculate the midpoint, you will need both the bottom and top of the respective ranges.
For example, your Client Services Department may have a host of different positions, but the range for each position falls within the pay range of $50,000 and $95,000. To calculate the salary midpoint for the Client Services Department, take the bottom and top figures and divide them by two. Here’s the formula:
$50,000 + $95,000 = $145,000?
$145,000 / 2?= $72,500
$72,500 = Salary midpoint
Armed with the salary midpoint for the Client Services Department, managers, HR, and recruiting professionals can calculate where their workers fall within the range. And with this information, you can set parameters around where new hires and tenured employees should fall in relation to your established range.?
Documenting this information in your pay policy is part of the process, but the policy should also include?how?to address instances when new or tenured employees’ compensation doesn’t align with your established ranges. If for example, a tenured employee falls below the salary midpoint range you’ve established, give them a raise to close the gap.?
The adjustment in pay may affect your bottom line, but the increase in salary is a worthy investment for the future of your workforce – and one that will certainly cost less than replacing them.?