Wage Compression: A Question of Balance

GRIFFIN VOLTMANN, Certification Manager, QualityPro

More than ever, companies are changing how they pay people. These changes are prompted by the need to recruit, but they impact the entire company. Wage compression poses both a recruitment and a retention challenge. Failure to move along with market trends limits a company’s ability to recruit new talent. But swinging too far to attract people can make it difficult to retain employees who notice their salaries aren’t similarly changing. How can you prevent wage compression before it happens or work through it when it does? We reached out to a few of our QualityPro accredited companies that have faced this challenge to see what their experiences and solutions were.

How Does Wage Compression Happen?

Pay compression or wage compression is a progressive issue that develops out of well-intentioned compensation practices over time. It arises when the difference between compensation for tenured employees and new hires or between managers and their direct reports begins to shrink. This can be due to a number of causes—changes in the job market might increase demand for certain jobs while the supply of qualified candidates holds steady, meaning that starting salaries increase to attract limited candidates. Perhaps a company has not, historically, set hiring or payment practices and failed to adjust salaries for existing employees as they’ve increased starting salaries for new hires. It might even be something as simple as the minimum wage increasing and requiring salaries for new hires to increase along with it.

In a survey by Pearl Meyer on behalf of the Society for Human Resource Management (SHRM), the leading causes of wage compression in a sample of businesses across the U.S. were "longer-term employees started at lower salaries, and annual increases have not kept pace with current market demands/inflation," "job requires a ‘hot skill’ that led the company to raise the starting salary to attract the right talent," and "nature of the job changed." What we see here is a pattern of changes on the recruitment side of the business that are not met with similar changes on the retention side. Wage compression is known to be common in states where the minimum wage is increasing, and the survey notes specifically that in cases where employers respond by increasing their hourly wage rate, they may experience a situation in which "hourly workers may be making more than salaried contributors, and even more than their managers."

Leila Starwich, Human Resources director for Sprague Pest Solutions, described it as a question of balance—as businesses adjust to account for inflation and cost of living, are they also adjusting for the gap this will naturally create? Are companies creating occasions to make sure they’re moving senior staff up in order to increase retention? When addressing existing or long-term employees, Starwich suggests asking "what does your job look like now versus when you came in?" Part of the problem, as both Sprague and SHRM agree, is that it can become a self-perpetuating cycle of costs. Hiring on new talent is expensive, and improving employee retention is not just good for morale but for a company’s bottom line. High turnover means high hiring expenses, which in turn limits a company’s ability to compensate existing employees. As Starwich put it "if you can keep your turnover down, that’s a major piece that can offset the cost of paying people more."

Prevention Through Planning

Regina Lawrence, Human Resources Manager for Economy Exterminators, Inc., said that their approach has been to create a tiered system in which pay increases are connected to specific benchmarks and employees are made aware of what they need to do to make a given amount. The tiers are shared with employees right away and employees feel engaged in their future. This increased connection with new hires continues through and after the critical first 90 days in the form of ongoing conversations with HR that give employees a chance to express concerns and give feedback in order to prevent issues. Economy Exterminators has been able to increase their starting salaries by around 30% in the past few years and retained employees by continuing their discussions of a more formal career pathway so everyone’s expectations are in line. Another benefit of having happy, tenured employees is a successful referral program. Lawrence notes that their last four hires have come from referrals.

Del Lawson, Vice President of Operations for Modern Pest Control, considers the problem to be uniquely difficult to address for smaller companies that may not have the same opportunities for career growth within the business as larger companies do. Instead of a formal career pathway, they’ve found success through a benefits and compensation program based on revenue performance and a flexible work schedule so employees continue to feel like a valued part of the process. They find that retention improves as employee quality of life improves, and that helping employees strike the correct work-life balance by providing necessary benefits helps improve employee buy-in.

What all our sources agree on is that transparency is key to moving forward. Transparency of expectations and career paths is important to recruiting qualified new hires. Transparency of procedures and benefits is key to retaining the staff you already have, and transparency of mission and vision moving forward is vital to long term growth and security. If your company is looking to implement a career paths program, get in touch with QualityPro so we can share our template and what we’ve learned.