Pay compression happens when the pay of an employee is very close to the pay of more experienced and higher performing employees in the same job or those in higher-level jobs like manager jobs.

How do you solve it?

1) You look for it. You do a pay compression analysis at least once a year and look for these scenarios. (Do not forget to consider overtime earnings in your analysis of the direct reports to managers.)

2) You budget for it. Recognize this happens when you have a short-term focus on getting candidates to say “yes” to job offers without also looking at current employees and their pay with an internal equity lens.
3) You adjust the pay of the employees that are being paid lower than they should be paid. You bring internal equity back into alignment.

Do you want to be proactive instead of reactive?

1) Establish an expected pay differential between the highest paid direct report and their manager at 10% to 15% for most scenarios. You may need to establish starting base pay rates that are higher than the grade range minimum for some manager jobs.

2) Document and follow a consistent process for all pay decisions (new hires, promotions, market adjustments, etc.). The methodology should consider factors like job-related experience, education, performance, tenure, and/or work location.

Is it better to be proactive than reactive?

Yes, especially given the pay equity and pay transparency legislation that continues to be passed here in the U.S. and in other countries.

If you don’t have the resources to do this work, let’s talk. My team and I have experience in a variety of industries, and understand the balance between competitive pay, internal equity, and an employer’s budget.

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Source: SHRM