Salary Compression

Salary compression occurs when newly hired employees earn salaries close to or equal to those of existing, experienced employees. This often arises because starting salaries reflect current market rates, which may outpace incremental raises for tenured employees.

Causes of Wage Compression:

1. Minimum Wage Increases: Elevates wages for newer hires but narrows the pay gap with existing employees.
2. Tight Labor Market: Companies offer higher starting salaries to attract talent, creating discrepancies.
3. Arbitrary Pay Structures: Inconsistent pay practices, like failing to standardize raises, exacerbate compression issues.

Negative Impacts:

1. Employee Morale and Culture: Employees may feel undervalued, leading to dissatisfaction and a sense of unfairness.
2. Turnover: Frustrated employees, particularly long-tenured ones, may leave for better opportunities.
3. Legal Risks: Wage inversion or disparities can lead to discrimination claims, damaging the company’s reputation and morale.

Prevention and Mitigation:

1. Track Market Rates: Regularly monitor and adjust salaries to align with market standards.
2. Pay Equity Reviews: Conduct annual reviews to identify and address disparities.
3. Non-Financial Compensation: Offer benefits such as flexible work arrangements, extra PTO, or student loan assistance when budget constraints prevent salary increases.

Ref: https://lattice.com/articles/what-is-wage-compression-and-what-can-you-do-about-it#:~:text=Wage%20compression%2C%20also%20known%20as,to%20what%20current%20employees%20make.

https://en.wikipedia.org/wiki/Wage_compression

https://www.visier.com/blog/salary-compression/

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