Dealing with Pay Compression: Issues and Strategies

HR administrators need to ensure pay compression doesn’t lead to employee pay inequity, low morale, and high turnover.

Pay compression occurs when pay differentials between employees in the same job or between supervisors and subordinates are too small to be considered equitable. Pay compression is a common cause of inequity in pay systems across public and private sector organizations. Excessive pay compression may lead to low employee morale and increased turnover. In extreme cases, pay inequities can lead to legal claims in violation of equal pay laws.

Types of Pay Compression

Pay compression issues are present in most pay systems and happen for many reasons. The three most common reasons include:

• Paying new hires above the pay of other employees with more experience or responsibilities in the same job—The tight labor market and low unemployment has forced some employers to offer new hires salaries near or higher than current experienced employees, regardless of internal equity considerations. Shallow applicant pools for experienced bus drivers, licensed trades, and specialized or licensed service providers, such as speech-language pathologists and occupational/physical therapists, are some examples contributing to this issue in school districts.
• Paying supervisors or managers less than their subordinates—This situation is most common when nonexempt employees, such as HVAC technicians or electricians, earn more than their exempt supervisor who works comparable hours but does not receive overtime pay. According to the Society for Human Resources Professionals (SHRM), when salaries of subordinates are 80 percent of a supervisor’s salary or higher, equity adjustments may be necessary to resolve this inequity issue.
• Paying recently promoted employees more than their counterparts—The most common pay compression issue in school districts occurs between classroom teachers and other jobs in the educator career pathway, such as counselors or assistant principals. Oftentimes, this is directly related to legislatively mandated teacher pay increases and poor pay practices that historically have provided higher pay increases for teachers than administrators.

Other reasons for pay compression include: 

• Outdated pay structures that are not aligned to market
• Pay ranges adjusted too aggressively relative to pay increase budget
• Midpoint progressions that are too close (less than 5 percent) to properly value pay differences between job levels
• Federal or state enacted minimum wage increases
• Fair Labor Standards Act (FLSA) overtime threshold increases
• Offering disproportionate amount of add-on pay through overtime or stipends 
• Absence of pay procedures to guide pay administration in a consistent and fair manner
• Promotion practices that provide too high or too low pay increases
• Paying new hires extremely high in the range

Strategies to Remedy Pay Compression

While there is no quick or easy solution, pay compression problems can be resolved over time with proper planning and review. Organizations ultimately determine what is fair and equitable within their defined pay guidelines and legal considerations. The goal is to improve the fairness of pay for employees. Strategies to remedy or minimize equity problems include:   

• Maintain the compensation plan aligned with market.
• Administer pay procedures consistently and adhere to plan control points.
• Review pay differences between employees in the same or similar jobs for equity regularly.
• Ensure the compensation plan provides appropriate pay differentials between job levels.
• Pay employees with more job-related experience higher in the range than those with less.
• Carve out money in the budget for equity adjustments to fix pay inequities. 
• Conduct full compensation plan reviews every 3 to 5 years.

Correcting pay inequity is challenging and costly but ignoring the issues can lead to low employee morale, turnover, and potential legal claims.