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Understanding and preventing wage compression

September 20, 2016

By Cindy Angerer, HR Business Partner, CCP, SPHR, courtesy of HR Collaborative

We have wrapped up the series on “To be or not to be exempt” which provided an excellent foundation for understanding the Fair Labor Standards Act (FLSA). Now we move on to other topics to help your organization get the most “bang for your buck” when compensating your employees.

Our next topic is: Understanding and Preventing Wage Compression

What is Wage Compression?
Your organization is experiencing wage compression when one of the following scenarios takes place.

Scenario 1. “Congratulations on your promotion to Supervisor, Machine Operator!  Yes, you still have to work the same schedule as the employees you supervise, but now as an exempt employee you are no longer eligible for overtime pay.  Yes, that does mean that even with your promotional pay increase, you will earn about the same because you are no longer receiving an overtime premium.”  

As you can imagine, this scenario has employees less than excited about their promotion into greater job responsibilities!

Scenario 2. An experienced employee with 10 years of service to the company, is asked to help train a new hire. To accept the position the new employee negotiated pay that is near the same pay as the experienced employee. The experienced employee learns the new hire’s pay rate and is upset to say the least.

The above are two of the common instances of wage compression but there are others. More broadly pay compression is when you have small differences in pay between employees regardless of differences in experience, level, or seniority.

These situations are difficult for the employee, their manager, and for maintaining positive morale in the organization and must be addressed.

First, what not to do:

As tempting as it may sound, forbidding employees to talk to each other about their pay is not an option. The National Labor Relations Act (NLRA) requires that all employees, whether unionized or not, have the right to talk about the terms and conditions of their employment, and this includes talking about compensation.  

What to do:

  • Compare frontline supervisor pay to the average wages of those they supervise. (Include yearly overtime). Increase base pay to ensure there is a meaningful difference.
  • Utilize salary survey data to compare your internal pay to what other companies are paying and make adjustments accordingly.
  • Compare new hire pay to the pay of experienced employees in the same positon to look for signs of pay compression and make adjustments accordingly.
  • To keep new hire salaries in line with existing employees, consider lowering hiring requirements and look for high potential candidates that with training can grow into the position. 
  • Think hard about what your company offers beyond pay, and as you add staff look for new talent that value it. Can you offer flexible hours?  Healthy/work life balance? 
  • Consider whether your organization may be ready for a full compensation plan that would include a compensation philosophy, pay ranges and methodology for moving employees through the pay program. 

There is no one answer to preventing and addressing pay compression, but by being proactive and creative it can be effectively managed. If you would like information regarding HR Collaborative’s pay benchmarking and compensation planning services, please do not hesitate to reach out to us. 

HR Collaborative is a business consulting firm specializing in strategic human resource management. We operate in partnership with our clients and as an extension of their HR department. We help organizations build their HR systems, offering assistance within the broad spectrum of Human Capital Management. Contact: 616.965.7860 or www.hrcollaborative.net

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