Keep tabs on pay structure to avoid compression

An online retailer, let’s call it “Behemoth,” announced it was raising its minimum wage to $15 per hour. Cheers went up in warehouses across the nation, until some longtime Behemoth workers, who had climbed the pay scale from $8 to $15 per hour through years of hard work and loyalty to the company, realized their inexperienced co-workers would now be making as much as they were. Behemoth quickly determined that raises were also in order for established employees, to reward their seniority and loyalty, and keep them from jumping ship and taking their knowledge with them.

In other words, Behemoth had to remedy a case of pay compression.

Pay compression occurs when new hires are paid the same or more than current workers in the same position, or when the pay difference between job levels shrinks so much that higher-level workers no longer see their pay advantage as meaningful.

While the story above is a fictionalized simplification of events surrounding the pay structure of an actual retailer, its purpose is to explain why establishing and maintaining your organization’s pay structure is important. In today’s tight job market, you may be tempted to up your salary offers to get new talent on board, only to realize later you’ve caused friction between new hires and experienced workers by compressing pay levels.

Evaluate jobs to establish internal pay equity

To prevent pay compression, employers should establish internal pay equity. This means paying employees in proportion to the relative value of their job. The aim is to place the same value on jobs that are similar in type, difficulty, responsibility, and qualifications.

To create pay equity, you must determine the value of a job as it relates to similar jobs within the organization. In the story of Behemoth, if workers with years on the job and greater responsibilities were making $15 an hour, bringing in new hires at $15 would not be seen as “equitable” by those more experienced workers.

It helps to create job families, which are positions that are essentially the same, regardless of the department in which they are located. This makes more sense than organizing jobs by department, since departments are made up of multiple positions that do different tasks.

Once job families are established, factors such as skill, effort, responsibility, and working conditions can be considered in order to determine compensation.

Judy Kneiszel is an associate editor with J. J. Keller & Associates. Kneiszel specializes in business topics such as recruiting and hiring, onboarding and training, team building, employee retention, and labor relations. She is the editor of J. J. Keller’s SUPER adVISOR newsletter and Essentials of Employee Relations manual.

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